Does System1 Group (LON:SYS1) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies System1 Group PLC (LON:SYS1) makes use of 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for System1 Group

How Much Debt Does System1 Group Carry?

As you can see below, System1 Group had UK£2.50m of debt at September 2021, down from UK£2.99m a year prior. However, its balance sheet shows it holds UK£10.0m in cash, so it actually has UK£7.54m net cash.

How Strong Is System1 Group's Balance Sheet?

We can see from the most recent balance sheet that System1 Group had liabilities of UK£6.56m falling due within a year, and liabilities of UK£4.25m due beyond that. Offsetting these obligations, it had cash of UK£10.0m as well as receivables valued at UK£6.80m due within 12 months. So it can boast UK£6.03m more liquid assets than total liabilities.

This surplus suggests that System1 Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, System1 Group boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, System1 Group turned things around in the last 12 months, delivering and EBIT of UK£4.8m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine System1 Group'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. System1 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, System1 Group recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that System1 Group has net cash of UK£7.54m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of UK£4.0m, being 83% of its EBIT. So is System1 Group's debt a risk? It doesn't seem so to us. 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. To that end, you should learn about the 5 warning signs we've spotted with System1 Group (including 1 which shouldn't be ignored) .

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. 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.