Benchmark Holdings (LON:BMK) Is Making Moderate Use Of Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Benchmark Holdings plc (LON:BMK) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Benchmark Holdings

What Is Benchmark Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Benchmark Holdings had debt of UK£78.9m at the end of September 2023, a reduction from UK£87.1m over a year. However, it also had UK£36.5m in cash, and so its net debt is UK£42.3m.

A Look At Benchmark Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Benchmark Holdings had liabilities of UK£75.1m due within 12 months and liabilities of UK£113.6m due beyond that. Offsetting these obligations, it had cash of UK£36.5m as well as receivables valued at UK£41.7m due within 12 months. So it has liabilities totalling UK£110.4m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Benchmark Holdings is worth UK£303.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Benchmark 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 Benchmark Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 7.5%, to UK£169m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Benchmark Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost UK£872k 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of UK£18m into a profit. So we do think this stock is quite 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 Benchmark Holdings insider transactions.

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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