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. Importantly, Mulberry Group plc (LON:MUL) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Mulberry Group's Net Debt?
As you can see below, at the end of April 2022, Mulberry Group had UK£5.00m of debt, up from UK£4.67m a year ago. Click the image for more detail. However, it does have UK£25.7m in cash offsetting this, leading to net cash of UK£20.7m.
A Look At Mulberry Group's Liabilities
We can see from the most recent balance sheet that Mulberry Group had liabilities of UK£41.7m falling due within a year, and liabilities of UK£54.3m due beyond that. Offsetting these obligations, it had cash of UK£25.7m as well as receivables valued at UK£10.8m due within 12 months. So it has liabilities totalling UK£59.6m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Mulberry Group has a market capitalization of UK£145.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Mulberry Group boasts net cash, so it's fair to say it does not have a heavy debt load!
Pleasingly, Mulberry Group is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 201% gain in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Mulberry Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Mulberry Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Mulberry Group actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
While Mulberry Group does have more liabilities than liquid assets, it also has net cash of UK£20.7m. The cherry on top was that in converted 169% of that EBIT to free cash flow, bringing in UK£27m. So we don't think Mulberry Group's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Mulberry Group you should be aware of.
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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Mulberry Group plc, through its subsidiaries, designs and manufactures fashion accessories and clothing in the United Kingdom, Asia Pacific, and internationally.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
|Analysis Area||Score (0-6)|
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Mediocre balance sheet and slightly overvalued.