Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that boohoo group plc (LON:BOO) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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 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 boohoo group
What Is boohoo group's Net Debt?
As you can see below, boohoo group had UK£325.0m of debt, at February 2024, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of UK£230.0m, its net debt is less, at about UK£95.0m.
A Look At boohoo group's Liabilities
The latest balance sheet data shows that boohoo group had liabilities of UK£332.0m due within a year, and liabilities of UK£463.7m falling due after that. On the other hand, it had cash of UK£230.0m and UK£21.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£544.0m.
When you consider that this deficiency exceeds the company's UK£397.5m market capitalization, you might well be inclined to review the balance sheet intently. 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.
In the last year boohoo group had a loss before interest and tax, and actually shrunk its revenue by 17%, to UK£1.5b. That's not what we would hope to see.
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. Indeed, it lost a very considerable UK£44m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through UK£63m in negative free cash flow over the last year. That means it's on the risky side of things. 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 1 warning sign for boohoo group you should be aware of.
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. 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.
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About AIM:BOO
boohoo group
Through its subsidiaries, operates as an online clothing retailer in the United Kingdom, rest of Europe, the United States, and internationally.
Undervalued very low.
