Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Ocado Group plc (LON:OCDO) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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 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 step when considering a company's debt levels is to consider its cash and debt together.
What Is Ocado Group's Net Debt?
As you can see below, at the end of November 2021, Ocado Group had UK£1.30b of debt, up from UK£997.4m a year ago. Click the image for more detail. However, it does have UK£1.47b in cash offsetting this, leading to net cash of UK£168.6m.
A Look At Ocado Group's Liabilities
We can see from the most recent balance sheet that Ocado Group had liabilities of UK£467.0m falling due within a year, and liabilities of UK£2.21b due beyond that. Offsetting these obligations, it had cash of UK£1.47b as well as receivables valued at UK£324.2m due within 12 months. So its liabilities total UK£881.4m more than the combination of its cash and short-term receivables.
Since publicly traded Ocado Group shares are worth a very impressive total of UK£9.11b, 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. Despite its noteworthy liabilities, Ocado Group boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Ocado Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Ocado Group reported revenue of UK£2.5b, which is a gain of 7.2%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Ocado Group?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Ocado Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through UK£707m of cash and made a loss of UK£223m. But the saving grace is the UK£168.6m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Ocado Group you should know about.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.