Is Ocado Group (LON:OCDO) 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.' 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 can see that Ocado Group plc (LON:OCDO) does use debt in its business. But should shareholders be worried about its use of debt?

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Ocado Group Carry?

The image below, which you can click on for greater detail, shows that Ocado Group had debt of UK£1.39b at the end of December 2024, a reduction from UK£1.46b over a year. However, it does have UK£732.5m in cash offsetting this, leading to net debt of about UK£654.2m.

How Healthy Is Ocado Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ocado Group had liabilities of UK£831.3m due within 12 months and liabilities of UK£2.15b due beyond that. Offsetting these obligations, it had cash of UK£732.5m as well as receivables valued at UK£153.5m due within 12 months. So it has liabilities totalling UK£2.10b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of UK£2.15b, so it does suggest shareholders should keep an eye on Ocado Group's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 Ocado Group 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.

Check out our latest analysis for Ocado Group

In the last year Ocado Group wasn't profitable at an EBIT level, but managed to grow its revenue by 4.9%, to UK£1.2b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Ocado Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable UK£244m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled UK£131m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Ocado Group you should be aware of.

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.