Celtic (LON:CCP) Has A Pretty Healthy 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.' 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. As with many other companies Celtic plc (LON:CCP) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Check out our latest analysis for Celtic

What Is Celtic's Debt?

As you can see below, Celtic had UK£4.24m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has UK£77.2m in cash, leading to a UK£73.0m net cash position.

How Healthy Is Celtic's Balance Sheet?

We can see from the most recent balance sheet that Celtic had liabilities of UK£84.1m falling due within a year, and liabilities of UK£12.3m due beyond that. Offsetting this, it had UK£77.2m in cash and UK£38.0m in receivables that were due within 12 months. So it actually has UK£18.8m more liquid assets than total liabilities.

This surplus suggests that Celtic has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Celtic boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Celtic's load is not too heavy, because its EBIT was down 38% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Celtic's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Celtic 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 two years, Celtic actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Celtic has UK£73.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of UK£6.1m, being 246% of its EBIT. So we don't have any problem with Celtic's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Celtic (at least 1 which is significant) , and understanding them should be part of your investment process.

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.