Is Leeds Group (LON:LDSG) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Leeds Group plc (LON:LDSG) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Leeds Group

What Is Leeds Group's Net Debt?

As you can see below, Leeds Group had UK£4.94m of debt at November 2020, down from UK£10.9m a year prior. However, because it has a cash reserve of UK£905.0k, its net debt is less, at about UK£4.03m.

How Healthy Is Leeds Group's Balance Sheet?

We can see from the most recent balance sheet that Leeds Group had liabilities of UK£6.75m falling due within a year, and liabilities of UK£2.83m due beyond that. On the other hand, it had cash of UK£905.0k and UK£3.94m worth of receivables due within a year. So its liabilities total UK£4.73m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of UK£6.69m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Leeds Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Leeds Group made a loss at the EBIT level, and saw its revenue drop to UK£36m, which is a fall of 2.1%. We would much prefer see growth.

Caveat Emptor

Importantly, Leeds Group had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at UK£165k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of UK£575k into a profit. So in short it's a really risky stock. 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 instance, we've identified 3 warning signs for Leeds Group (2 are potentially serious) you should be aware of.

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. 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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