Joules Group (LON:JOUL) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Joules Group Plc (LON:JOUL) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Joules Group

What Is Joules Group's Net 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?

Zooming in on the latest balance sheet data, we can see that Joules Group had liabilities of UK£78.8m due within 12 months and liabilities of UK£44.2m due beyond that. On the other hand, it had cash of UK£28.6m and UK£13.5m worth of receivables due within a year. So its liabilities total UK£81.0m more than the combination of its cash and short-term receivables.

Joules Group has a market capitalization of UK£172.4m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Joules Group also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Joules Group had a loss before interest and tax, and actually shrunk its revenue by 19%, to UK£174m. We would much prefer see growth.

So How Risky Is Joules Group?

Although Joules Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of UK£10m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. 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. For example Joules Group has 3 warning signs (and 1 which can't be ignored) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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