Is Benchmark Holdings (LON:BMK) Using Too Much 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 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 Benchmark Holdings plc (LON:BMK) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See 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£80.7m at the end of December 2022, a reduction from UK£95.8m over a year. However, it also had UK£42.8m in cash, and so its net debt is UK£37.9m.

How Strong Is Benchmark Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Benchmark Holdings had liabilities of UK£63.4m due within 12 months and liabilities of UK£117.4m due beyond that. Offsetting these obligations, it had cash of UK£42.8m as well as receivables valued at UK£51.2m due within 12 months. So it has liabilities totalling UK£86.9m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Benchmark Holdings has a market capitalization of UK£308.3m, 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. 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 27%, to UK£173m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Benchmark Holdings managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at UK£4.6m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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£28m into a profit. So we do think this stock is quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Benchmark Holdings has 3 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.