Good Energy Group (LON:GOOD) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Good Energy Group PLC (LON:GOOD) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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, 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Good Energy Group

What Is Good Energy Group's Debt?

The chart below, which you can click on for greater detail, shows that Good Energy Group had UK£5.12m in debt in June 2023; about the same as the year before. But on the other hand it also has UK£34.9m in cash, leading to a UK£29.8m net cash position.

How Strong Is Good Energy Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Good Energy Group had liabilities of UK£79.8m due within 12 months and liabilities of UK£89.0k due beyond that. Offsetting these obligations, it had cash of UK£34.9m as well as receivables valued at UK£46.7m due within 12 months. So it actually has UK£1.71m more liquid assets than total liabilities.

This short term liquidity is a sign that Good Energy Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Good Energy Group boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Good Energy Group turned things around in the last 12 months, delivering and EBIT of UK£17m. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Good Energy 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Good Energy 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. Over the last year, Good Energy Group actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Good Energy Group has net cash of UK£29.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of UK£21m, being 123% of its EBIT. So is Good Energy Group's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Good Energy Group you should be aware of.

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.

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

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.