Health Check: How Prudently Does Stanley Gibbons Group (LON:SGI) Use Debt?

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. 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 The Stanley Gibbons Group plc (LON:SGI) 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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Stanley Gibbons Group

What Is Stanley Gibbons Group's Net Debt?

As you can see below, at the end of March 2019, Stanley Gibbons Group had UK£11.5m of debt, up from UK£10.0m a year ago. Click the image for more detail. However, because it has a cash reserve of UK£2.16m, its net debt is less, at about UK£9.37m.

A Look At Stanley Gibbons Group's Liabilities

According to the last reported balance sheet, Stanley Gibbons Group had liabilities of UK£6.04m due within 12 months, and liabilities of UK£17.1m due beyond 12 months. On the other hand, it had cash of UK£2.16m and UK£1.52m worth of receivables due within a year. So it has liabilities totalling UK£19.4m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the UK£10.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet." So we definitely think shareholders need to watch this one closely. At the end of the day, Stanley Gibbons Group would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Stanley Gibbons Group will need earnings to service that debt. 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, Stanley Gibbons Group made a loss at the EBIT level, and saw its revenue drop to UK£12m, which is a fall of 13%. That's not what we would hope to see.

Caveat Emptor

While Stanley Gibbons 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£3.8m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through UK£4.0m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. For riskier companies like Stanley Gibbons Group I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.