Is boohoo group (LON:BOO) Using Debt In A Risky Way?

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 note that boohoo group plc (LON:BOO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for boohoo group

What Is boohoo group's Debt?

As you can see below, boohoo group had UK£325.0m of debt, at August 2023, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has UK£290.0m in cash leading to net debt of about UK£35.0m.

A Look At boohoo group's Liabilities

We can see from the most recent balance sheet that boohoo group had liabilities of UK£328.9m falling due within a year, and liabilities of UK£473.3m due beyond that. Offsetting these obligations, it had cash of UK£290.0m as well as receivables valued at UK£16.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£496.2m.

Given this deficit is actually higher than the company's market capitalization of UK£475.5m, we think shareholders really should watch boohoo group's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if boohoo group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, boohoo group made a loss at the EBIT level, and saw its revenue drop to UK£1.6b, which is a fall of 14%. We would much prefer see growth.

Caveat Emptor

While boohoo group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping UK£49m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of UK£83m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how boohoo group's profit, revenue, and operating cashflow have changed over the last few years.

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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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.