Is Celtic (LON:CCP) Weighed On By Its Debt Load?

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 Celtic plc (LON:CCP) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See 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£7.75m at the end of December 2020, a reduction from UK£9.01m over a year. But on the other hand it also has UK£23.2m in cash, leading to a UK£15.4m net cash position.

How Strong Is Celtic's Balance Sheet?

According to the last reported balance sheet, Celtic had liabilities of UK£51.7m due within 12 months, and liabilities of UK£11.9m due beyond 12 months. Offsetting this, it had UK£23.2m in cash and UK£15.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£25.1m.

This deficit isn't so bad because Celtic is worth UK£108.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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.

Over 12 months, Celtic made a loss at the EBIT level, and saw its revenue drop to UK£58m, which is a fall of 34%. To be frank that doesn't bode well.

So How Risky Is Celtic?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Celtic had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through UK£11m of cash and made a loss of UK£25m. Given it only has net cash of UK£15.4m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For instance, we've identified 1 warning sign for Celtic that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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