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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Crest Nicholson Holdings plc (LON:CRST) 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Crest Nicholson Holdings

What Is Crest Nicholson Holdings's Debt?

As you can see below, Crest Nicholson Holdings had UK£97.4m of debt, at April 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has UK£166.3m in cash to offset that, meaning it has UK£68.9m net cash.

A Look At Crest Nicholson Holdings' Liabilities

We can see from the most recent balance sheet that Crest Nicholson Holdings had liabilities of UK£370.8m falling due within a year, and liabilities of UK£214.9m due beyond that. On the other hand, it had cash of UK£166.3m and UK£107.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£311.8m.

This deficit is considerable relative to its market capitalization of UK£411.1m, so it does suggest shareholders should keep an eye on Crest Nicholson Holdings' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Crest Nicholson Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Crest Nicholson Holdings's EBIT dived 16%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the most recent three years, Crest Nicholson Holdings recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While Crest Nicholson Holdings does have more liabilities than liquid assets, it also has net cash of UK£68.9m. The cherry on top was that in converted 73% of that EBIT to free cash flow, bringing in -UK£68m. So we are not troubled with Crest Nicholson Holdings's debt use. 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 example, we've discovered 3 warning signs for Crest Nicholson Holdings (2 are a bit concerning!) that you should be aware of before investing here.

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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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.