These 4 Measures Indicate That Bonhill Group (LON:BONH) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 can see that Bonhill Group Plc (LON:BONH) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Bonhill Group

What Is Bonhill Group's Net Debt?

The image below, which you can click on for greater detail, shows that Bonhill Group had debt of UK£1.27m at the end of June 2021, a reduction from UK£2.89m over a year. But it also has UK£1.29m in cash to offset that, meaning it has UK£19.0k net cash.

How Strong Is Bonhill Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bonhill Group had liabilities of UK£5.31m due within 12 months and liabilities of UK£2.38m due beyond that. Offsetting this, it had UK£1.29m in cash and UK£3.44m in receivables that were due within 12 months. So its liabilities total UK£2.97m more than the combination of its cash and short-term receivables.

Bonhill Group has a market capitalization of UK£9.51m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Bonhill Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Bonhill Group made a loss at the EBIT level, last year, it was also good to see that it generated UK£4.9m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Bonhill 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. Bonhill Group 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. Over the last year, Bonhill Group recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While Bonhill Group does have more liabilities than liquid assets, it also has net cash of UK£19.0k. So we are not troubled with Bonhill Group's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Bonhill Group has 3 warning signs we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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