Creightons (LON:CRL) Has A Rock Solid Balance Sheet

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.' 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. Importantly, Creightons Plc (LON:CRL) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Creightons

What Is Creightons's Debt?

You can click the graphic below for the historical numbers, but it shows that Creightons had UK£2.81m of debt in March 2021, down from UK£3.53m, one year before. However, it does have UK£6.56m in cash offsetting this, leading to net cash of UK£3.75m.

How Healthy Is Creightons' Balance Sheet?

We can see from the most recent balance sheet that Creightons had liabilities of UK£9.91m falling due within a year, and liabilities of UK£3.55m due beyond that. Offsetting these obligations, it had cash of UK£6.56m as well as receivables valued at UK£9.91m due within 12 months. So it actually has UK£3.01m more liquid assets than total liabilities.

This short term liquidity is a sign that Creightons could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Creightons has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Creightons grew its EBIT by 64% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Creightons will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Creightons may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Creightons's free cash flow amounted to 36% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Creightons has net cash of UK£3.75m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 64% over the last year. So we don't think Creightons's use of debt is 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 - Creightons has 2 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.
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