Is Ocado Group (LON:OCDO) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Ocado Group plc (LON:OCDO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Ocado Group

What Is Ocado Group's Debt?

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 also had UK£732.5m in cash, and so its net debt is UK£654.2m.

How Strong Is Ocado Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ocado Group had liabilities of UK£324.9m due within 12 months and liabilities of UK£2.66b due beyond that. On the other hand, it had cash of UK£732.5m and UK£193.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£2.06b.

This deficit is considerable relative to its market capitalization of UK£2.25b, so it does suggest shareholders should keep an eye on Ocado Group's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ocado 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.

Over 12 months, Ocado Group made a loss at the EBIT level, and saw its revenue drop to UK£1.2b, which is a fall of 57%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Ocado Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping UK£337m. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled UK£131m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.