Would City Pub Group (LON:CPC) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, The City Pub Group plc (LON:CPC) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for City Pub Group

What Is City Pub Group's Debt?

The image below, which you can click on for greater detail, shows that City Pub Group had debt of UK£24.8m at the end of December 2020, a reduction from UK£32.3m over a year. However, it does have UK£12.3m in cash offsetting this, leading to net debt of about UK£12.5m.

A Look At City Pub Group's Liabilities

We can see from the most recent balance sheet that City Pub Group had liabilities of UK£10.5m falling due within a year, and liabilities of UK£44.7m due beyond that. Offsetting these obligations, it had cash of UK£12.3m as well as receivables valued at UK£3.06m due within 12 months. So it has liabilities totalling UK£39.9m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since City Pub Group has a market capitalization of UK£137.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 City Pub 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.

In the last year City Pub Group had a loss before interest and tax, and actually shrunk its revenue by 57%, to UK£26m. That makes us nervous, to say the least.

Caveat Emptor

Not only did City Pub Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at UK£6.5m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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£1.0m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting City Pub Group insider transactions.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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