Here's Why Benchmark Holdings (LON:BMK) Can Afford Some Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Benchmark Holdings plc (LON:BMK) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Benchmark Holdings

What Is Benchmark Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Benchmark Holdings had UK£68.4m of debt in September 2024, down from UK£82.1m, one year before. However, because it has a cash reserve of UK£23.1m, its net debt is less, at about UK£45.4m.

How Healthy Is Benchmark Holdings' Balance Sheet?

According to the last reported balance sheet, Benchmark Holdings had liabilities of UK£146.3m due within 12 months, and liabilities of UK£14.4m due beyond 12 months. Offsetting this, it had UK£23.1m in cash and UK£42.9m in receivables that were due within 12 months. So its liabilities total UK£94.7m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Benchmark Holdings has a market capitalization of UK£200.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 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 had a loss before interest and tax, and actually shrunk its revenue by 13%, to UK£90m. That's not what we would hope to see.

Caveat Emptor

While Benchmark Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost UK£15m 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. However, it doesn't help that it burned through UK£1.9m of cash over the last year. So suffice it to say we do consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Benchmark Holdings's profit, revenue, and operating cashflow have changed over the last few years.

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.