Health Check: How Prudently Does Ten Lifestyle Group (LON:TENG) Use Debt?

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. As with many other companies Ten Lifestyle Group Plc (LON:TENG) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Ten Lifestyle Group

How Much Debt Does Ten Lifestyle Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of August 2022 Ten Lifestyle Group had UK£3.44m of debt, an increase on none, over one year. But on the other hand it also has UK£6.58m in cash, leading to a UK£3.14m net cash position.

A Look At Ten Lifestyle Group's Liabilities

According to the last reported balance sheet, Ten Lifestyle Group had liabilities of UK£20.6m due within 12 months, and liabilities of UK£2.76m due beyond 12 months. Offsetting these obligations, it had cash of UK£6.58m as well as receivables valued at UK£5.63m due within 12 months. So its liabilities total UK£11.2m more than the combination of its cash and short-term receivables.

Of course, Ten Lifestyle Group has a market capitalization of UK£64.4m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Ten Lifestyle Group also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Ten Lifestyle Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Ten Lifestyle Group wasn't profitable at an EBIT level, but managed to grow its revenue by 39%, to UK£49m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Ten Lifestyle Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Ten Lifestyle Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through UK£3.1m of cash and made a loss of UK£4.3m. While this does make the company a bit risky, it's important to remember it has net cash of UK£3.14m. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Ten Lifestyle Group may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. For example, we've discovered 1 warning sign for Ten Lifestyle Group that you should be aware of before investing here.

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.