Is Dods Group (LON:DODS) Using Too Much Debt?

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 Dods Group plc (LON:DODS) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Dods Group

What Is Dods Group's Net Debt?

As you can see below, Dods Group had UK£3.00m of debt at September 2020, down from UK£5.00m a year prior. However, it does have UK£4.10m in cash offsetting this, leading to net cash of UK£1.10m.

A Look At Dods Group's Liabilities

The latest balance sheet data shows that Dods Group had liabilities of UK£16.3m due within a year, and liabilities of UK£10.4m falling due after that. Offsetting these obligations, it had cash of UK£4.10m as well as receivables valued at UK£6.09m due within 12 months. So its liabilities total UK£16.5m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of UK£17.5m, so it does suggest shareholders should keep an eye on Dods Group's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Dods Group 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 it is Dods Group's earnings that will influence how the balance sheet holds up in the future. 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 Dods Group wasn't profitable at an EBIT level, but managed to grow its revenue by 10%, to UK£25m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Dods Group?

Although Dods Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of UK£1.2m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. Take risks, for example - Dods Group has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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