Is Mulberry Group (LON:MUL) Using Too Much Debt?

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. As with many other companies Mulberry Group plc (LON:MUL) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Mulberry Group

How Much Debt Does Mulberry Group Carry?

As you can see below, Mulberry Group had UK£4.92m of debt at September 2020, down from UK£9.58m a year prior. But it also has UK£8.60m in cash to offset that, meaning it has UK£3.67m net cash.

A Look At Mulberry Group's Liabilities

According to the last reported balance sheet, Mulberry Group had liabilities of UK£45.0m due within 12 months, and liabilities of UK£71.9m due beyond 12 months. On the other hand, it had cash of UK£8.60m and UK£11.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£96.4m.

This deficit is considerable relative to its market capitalization of UK£139.7m, so it does suggest shareholders should keep an eye on Mulberry Group's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Mulberry Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Mulberry Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Mulberry Group made a loss at the EBIT level, and saw its revenue drop to UK£129m, which is a fall of 22%. To be frank that doesn't bode well.

So How Risky Is Mulberry Group?

While Mulberry Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow UK£14m. 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. Be aware that Mulberry Group is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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