Stock Analysis

Is Equals Group (LON:EQLS) Using Too Much Debt?

AIM:EQLS
Source: Shutterstock

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Equals Group plc (LON:EQLS) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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. 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 Equals Group

What Is Equals Group's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Equals Group had debt of UK£2.00m, up from none in one year. But it also has UK£10.0m in cash to offset that, meaning it has UK£8.03m net cash.

debt-equity-history-analysis
AIM:EQLS Debt to Equity History May 15th 2021

How Healthy Is Equals Group's Balance Sheet?

According to the last reported balance sheet, Equals Group had liabilities of UK£16.1m due within 12 months, and liabilities of UK£11.2m due beyond 12 months. Offsetting these obligations, it had cash of UK£10.0m as well as receivables valued at UK£11.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£6.32m.

Since publicly traded Equals Group shares are worth a total of UK£77.8m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Equals Group boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Equals 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 Equals Group had a loss before interest and tax, and actually shrunk its revenue by 6.4%, to UK£29m. We would much prefer see growth.

So How Risky Is Equals 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 Equals Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through UK£1.8m of cash and made a loss of UK£6.9m. With only UK£8.03m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Equals Group is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

When trading Equals Group or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted


Valuation is complex, but we're here to simplify it.

Discover if Equals Group might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

Access Free Analysis

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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020


Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.