Does Celtic (LON:CCP) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Celtic plc (LON:CCP) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Net Debt?

The image below, which you can click on for greater detail, shows that Celtic had debt of UK£8.38m at the end of June 2020, a reduction from UK£9.66m over a year. However, its balance sheet shows it holds UK£22.4m in cash, so it actually has UK£14.0m net cash.

How Healthy Is Celtic's Balance Sheet?

We can see from the most recent balance sheet that Celtic had liabilities of UK£49.9m falling due within a year, and liabilities of UK£12.9m due beyond that. Offsetting these obligations, it had cash of UK£22.4m as well as receivables valued at UK£27.0m due within 12 months. So its liabilities total UK£13.3m more than the combination of its cash and short-term receivables.

Since publicly traded Celtic shares are worth a total of UK£97.7m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Celtic boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Celtic 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.

In the last year Celtic had a loss before interest and tax, and actually shrunk its revenue by 16%, to UK£70m. That's not what we would hope to see.

So How Risky Is Celtic?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Celtic had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through UK£9.1m of cash and made a loss of UK£368k. With only UK£14.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. For riskier companies like Celtic I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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. 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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