Is Harworth Group (LON:HWG) Using Too Much Debt?

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. We note that Harworth Group plc (LON:HWG) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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.

Check out our latest analysis for Harworth Group

How Much Debt Does Harworth Group Carry?

The chart below, which you can click on for greater detail, shows that Harworth Group had UK£84.7m in debt in December 2020; about the same as the year before. However, because it has a cash reserve of UK£12.7m, its net debt is less, at about UK£72.0m.

How Strong Is Harworth Group's Balance Sheet?

We can see from the most recent balance sheet that Harworth Group had liabilities of UK£66.8m falling due within a year, and liabilities of UK£103.5m due beyond that. On the other hand, it had cash of UK£12.7m and UK£56.4m worth of receivables due within a year. So it has liabilities totalling UK£101.1m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Harworth Group is worth UK£422.4m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Harworth Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Harworth Group made a loss at the EBIT level, and saw its revenue drop to UK£70m, which is a fall of 18%. We would much prefer see growth.

Caveat Emptor

Not only did Harworth Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at UK£4.0m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Surprisingly, we note that it actually reported positive free cash flow of UK£21m and a profit of UK£26m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Harworth Group you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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