Here's Why Countryside Properties (LON:CSP) Can Manage Its Debt Responsibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Countryside Properties PLC (LON:CSP) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Countryside Properties

What Is Countryside Properties's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Countryside Properties had UK£2.40m of debt, an increase on UK£2.30m, over one year. But on the other hand it also has UK£43.4m in cash, leading to a UK£41.0m net cash position.

How Healthy Is Countryside Properties' Balance Sheet?

We can see from the most recent balance sheet that Countryside Properties had liabilities of UK£370.0m falling due within a year, and liabilities of UK£262.1m due beyond that. On the other hand, it had cash of UK£43.4m and UK£197.9m worth of receivables due within a year. So its liabilities total UK£390.8m more than the combination of its cash and short-term receivables.

Since publicly traded Countryside Properties shares are worth a total of UK£2.36b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Countryside Properties also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Countryside Properties grew its EBIT by 88% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Countryside Properties's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Countryside Properties 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 three years, Countryside Properties saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While Countryside Properties does have more liabilities than liquid assets, it also has net cash of UK£41.0m. And we liked the look of last year's 88% year-on-year EBIT growth. So we are not troubled with Countryside Properties's debt use. We'd be motivated to research the stock further if we found out that Countryside Properties insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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.