David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Joules Group Plc (LON:JOUL) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Joules Group's Debt?
As you can see below, at the end of November 2020, Joules Group had UK£12.9m of debt, up from UK£12.1m a year ago. Click the image for more detail. However, it does have UK£28.6m in cash offsetting this, leading to net cash of UK£15.6m.
How Strong Is Joules Group's Balance Sheet?
The latest balance sheet data shows that Joules Group had liabilities of UK£78.8m due within a year, and liabilities of UK£44.2m falling due after that. Offsetting these obligations, it had cash of UK£28.6m as well as receivables valued at UK£13.5m due within 12 months. So it has liabilities totalling UK£81.0m more than its cash and near-term receivables, combined.
Joules Group has a market capitalization of UK£294.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Joules Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Joules Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Joules Group made a loss at the EBIT level, and saw its revenue drop to UK£174m, which is a fall of 19%. We would much prefer see growth.
So How Risky Is Joules Group?
While Joules Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow UK£10m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Joules Group (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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