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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Equals Group

How Much Debt Does Equals Group Carry?

As you can see below, Equals Group had UK£2.00m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has UK£13.1m in cash, leading to a UK£11.1m net cash position.

How Strong Is Equals Group's Balance Sheet?

According to the last reported balance sheet, Equals Group had liabilities of UK£15.3m due within 12 months, and liabilities of UK£6.08m due beyond 12 months. Offsetting this, it had UK£13.1m in cash and UK£7.66m in receivables that were due within 12 months. So its liabilities total UK£648.0k more than the combination of its cash and short-term receivables.

Having regard to Equals Group's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the UK£148.5m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Equals 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 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.

Over 12 months, Equals Group reported revenue of UK£44m, which is a gain of 52%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Equals Group?

While Equals Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow UK£3.9m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The good news for Equals Group shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. 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. We've identified 1 warning sign with Equals Group , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.