Is Plexus Holdings (LON:POS) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Plexus Holdings plc (LON:POS) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Plexus Holdings

What Is Plexus Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Plexus Holdings had debt of UK£1.09m, up from none in one year. However, it does have UK£3.38m in cash offsetting this, leading to net cash of UK£2.29m.

How Healthy Is Plexus Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Plexus Holdings had liabilities of UK£2.65m due within 12 months and liabilities of UK£1.22m due beyond that. Offsetting these obligations, it had cash of UK£3.38m as well as receivables valued at UK£3.40m due within 12 months. So it can boast UK£2.92m more liquid assets than total liabilities.

It's good to see that Plexus Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Plexus Holdings 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 ultimately the future profitability of the business will decide if Plexus Holdings 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 Plexus Holdings had a loss before interest and tax, and actually shrunk its revenue by 62%, to UK£895k. To be frank that doesn't bode well.

So How Risky Is Plexus Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Plexus Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through UK£6.6m of cash and made a loss of UK£3.3m. However, it has net cash of UK£2.29m, so it has a bit of time before it will need more capital. 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. 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. For instance, we've identified 3 warning signs for Plexus Holdings that you should be aware of.

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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