Does Jubilee Metals Group (LON:JLP) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Jubilee Metals Group PLC (LON:JLP) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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 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 Jubilee Metals Group

How Much Debt Does Jubilee Metals Group Carry?

As you can see below, Jubilee Metals Group had UK£9.18m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have UK£19.7m in cash offsetting this, leading to net cash of UK£10.5m.

How Strong Is Jubilee Metals Group's Balance Sheet?

We can see from the most recent balance sheet that Jubilee Metals Group had liabilities of UK£39.4m falling due within a year, and liabilities of UK£18.7m due beyond that. Offsetting these obligations, it had cash of UK£19.7m as well as receivables valued at UK£36.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£2.16m.

Having regard to Jubilee Metals Group's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the UK£380.2m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Jubilee Metals Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Jubilee Metals Group grew its EBIT by 186% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Jubilee Metals Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Jubilee Metals Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Jubilee Metals Group reported free cash flow worth 5.1% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

We could understand if investors are concerned about Jubilee Metals Group's liabilities, but we can be reassured by the fact it has has net cash of UK£10.5m. And we liked the look of last year's 186% year-on-year EBIT growth. So is Jubilee Metals Group's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Jubilee Metals Group (of which 1 shouldn't be ignored!) you should know about.

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.

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.