Does Crest Nicholson Holdings (LON:CRST) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Crest Nicholson Holdings plc (LON:CRST) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Crest Nicholson Holdings

What Is Crest Nicholson Holdings's Debt?

The chart below, which you can click on for greater detail, shows that Crest Nicholson Holdings had UK£97.9m in debt in October 2021; about the same as the year before. However, it does have UK£351.8m in cash offsetting this, leading to net cash of UK£253.9m.

How Strong Is Crest Nicholson Holdings' Balance Sheet?

We can see from the most recent balance sheet that Crest Nicholson Holdings had liabilities of UK£466.1m falling due within a year, and liabilities of UK£240.7m due beyond that. Offsetting these obligations, it had cash of UK£351.8m as well as receivables valued at UK£106.9m due within 12 months. So its liabilities total UK£248.1m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Crest Nicholson Holdings has a market capitalization of UK£641.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Crest Nicholson Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Crest Nicholson Holdings grew its EBIT by 115% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Crest Nicholson Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Crest Nicholson Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Crest Nicholson Holdings actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Crest Nicholson Holdings does have more liabilities than liquid assets, it also has net cash of UK£253.9m. And it impressed us with free cash flow of UK£126m, being 118% of its EBIT. So we don't think Crest Nicholson Holdings's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Crest Nicholson Holdings that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.