Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, System1 Group PLC (LON:SYS1) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for System1 Group
What Is System1 Group's Debt?
As you can see below, at the end of September 2020, System1 Group had UK£2.99m of debt, up from none a year ago. Click the image for more detail. However, it does have UK£8.05m in cash offsetting this, leading to net cash of UK£5.06m.
How Strong Is System1 Group's Balance Sheet?
The latest balance sheet data shows that System1 Group had liabilities of UK£5.36m due within a year, and liabilities of UK£5.00m falling due after that. Offsetting this, it had UK£8.05m in cash and UK£5.05m in receivables that were due within 12 months. So it can boast UK£2.74m 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! When analysing debt levels, the balance sheet is the obvious place to start. But it is System1 Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year System1 Group had a loss before interest and tax, and actually shrunk its revenue by 20%, to UK£22m. That makes us nervous, to say the least.
So How Risky Is System1 Group?
While System1 Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow UK£2.4m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for System1 Group (1 shouldn't be ignored!) that you should be aware of before investing here.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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About AIM:SYS1
System1 Group
Provides market research data and insight services in the United Kingdom, the United States, Latin America, rest of Europe, and the Asia Pacific.
Flawless balance sheet with solid track record.
