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. Importantly, Young & Co.'s Brewery, P.L.C. (LON:YNGA) does carry debt. But is this debt a concern to shareholders?
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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Young's Brewery's Debt?
You can click the graphic below for the historical numbers, but it shows that Young's Brewery had UK£135.7m of debt in September 2021, down from UK£168.7m, one year before. However, because it has a cash reserve of UK£68.2m, its net debt is less, at about UK£67.5m.
How Strong Is Young's Brewery's Balance Sheet?
We can see from the most recent balance sheet that Young's Brewery had liabilities of UK£45.8m falling due within a year, and liabilities of UK£304.8m due beyond that. On the other hand, it had cash of UK£68.2m and UK£10.4m worth of receivables due within a year. So its liabilities total UK£272.0m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Young's Brewery is worth UK£761.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Young's Brewery 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 Young's Brewery had a loss before interest and tax, and actually shrunk its revenue by 4.7%, to UK£188m. We would much prefer see growth.
Over the last twelve months Young's Brewery produced an earnings before interest and tax (EBIT) loss. Indeed, it lost UK£23m 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. We would feel better if it turned its trailing twelve month loss of UK£8.2m into a profit. So we do think this stock is quite risky. For riskier companies like Young's Brewery I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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.