Parkmead Group (LON:PMG) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies The Parkmead Group plc (LON:PMG) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Parkmead Group

What Is Parkmead Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Parkmead Group had UK£2.01m of debt in December 2020, down from UK£3.60m, one year before. However, it does have UK£24.5m in cash offsetting this, leading to net cash of UK£22.5m.

How Strong Is Parkmead Group's Balance Sheet?

We can see from the most recent balance sheet that Parkmead Group had liabilities of UK£4.16m falling due within a year, and liabilities of UK£13.7m due beyond that. On the other hand, it had cash of UK£24.5m and UK£3.53m worth of receivables due within a year. So it can boast UK£10.2m more liquid assets than total liabilities.

It's good to see that Parkmead Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Parkmead Group has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Parkmead Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Parkmead Group made a loss at the EBIT level, and saw its revenue drop to UK£3.5m, which is a fall of 31%. To be frank that doesn't bode well.

So How Risky Is Parkmead Group?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Parkmead Group had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of UK£1.3m and booked a UK£318k accounting loss. But the saving grace is the UK£22.5m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Parkmead Group has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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