Is Marks and Spencer Group (LON:MKS) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 can see that Marks and Spencer Group plc (LON:MKS) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Marks and Spencer Group

What Is Marks and Spencer Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Marks and Spencer Group had UK£697.4m of debt in September 2024, down from UK£1.05b, one year before. However, its balance sheet shows it holds UK£780.4m in cash, so it actually has UK£83.0m net cash.

How Healthy Is Marks and Spencer Group's Balance Sheet?

We can see from the most recent balance sheet that Marks and Spencer Group had liabilities of UK£2.63b falling due within a year, and liabilities of UK£3.02b due beyond that. On the other hand, it had cash of UK£780.4m and UK£388.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£4.48b.

This is a mountain of leverage relative to its market capitalization of UK£6.99b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Marks and Spencer Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Marks and Spencer Group grew its EBIT at 17% over the last year, further increasing its ability to manage 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 Marks and Spencer Group'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Marks and Spencer Group 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 last three years, Marks and Spencer Group recorded free cash flow worth a fulsome 92% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

Although Marks and Spencer Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of UK£83.0m. And it impressed us with free cash flow of UK£761m, being 92% of its EBIT. So we don't have any problem with Marks and Spencer Group's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Marks and Spencer Group's earnings per share history 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.