Is Go-Ahead Group (LON:GOG) 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.' 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. Importantly, The Go-Ahead Group plc (LON:GOG) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Go-Ahead Group

What Is Go-Ahead Group's Net Debt?

As you can see below, Go-Ahead Group had UK£409.0m of debt, at January 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have UK£540.8m in cash offsetting this, leading to net cash of UK£131.8m.

A Look At Go-Ahead Group's Liabilities

We can see from the most recent balance sheet that Go-Ahead Group had liabilities of UK£1.18b falling due within a year, and liabilities of UK£595.1m due beyond that. On the other hand, it had cash of UK£540.8m and UK£363.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£871.8m.

The deficiency here weighs heavily on the UK£526.7m 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'd watch its balance sheet closely, without a doubt. At the end of the day, Go-Ahead Group would probably need a major re-capitalization if its creditors were to demand repayment. Go-Ahead Group boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Shareholders should be aware that Go-Ahead Group's EBIT was down 59% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 Go-Ahead 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Go-Ahead Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Go-Ahead Group actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Go-Ahead Group does have more liabilities than liquid assets, it also has net cash of UK£131.8m. And it impressed us with free cash flow of UK£397m, being 282% of its EBIT. Despite the cash, we do find Go-Ahead Group's level of total liabilities concerning, so we're not particularly comfortable with the 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Go-Ahead Group you should know about.

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. 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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