Does Ted Baker (LON:TED) Have A Healthy Balance Sheet?

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.' 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. We note that Ted Baker Plc (LON:TED) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Ted Baker

What Is Ted Baker's Debt?

You can click the graphic below for the historical numbers, but it shows that as of August 2021 Ted Baker had UK£15.5m of debt, an increase on none, over one year. But on the other hand it also has UK£28.2m in cash, leading to a UK£12.7m net cash position.

A Look At Ted Baker's Liabilities

The latest balance sheet data shows that Ted Baker had liabilities of UK£137.9m due within a year, and liabilities of UK£107.8m falling due after that. Offsetting these obligations, it had cash of UK£28.2m as well as receivables valued at UK£74.7m due within 12 months. So its liabilities total UK£142.7m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of UK£227.1m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Ted Baker also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ted Baker's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Ted Baker made a loss at the EBIT level, and saw its revenue drop to UK£382m, which is a fall of 21%. That makes us nervous, to say the least.

So How Risky Is Ted Baker?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Ted Baker had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of UK£1.7m and booked a UK£33m accounting loss. Given it only has net cash of UK£12.7m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Be aware that Ted Baker is showing 3 warning signs in our investment analysis , and 2 of those shouldn't be ignored...

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.

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.

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