Here's Why Mr Price Group (JSE:MRP) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Mr Price Group Limited (JSE:MRP) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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.

See our latest analysis for Mr Price Group

What Is Mr Price Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Mr Price Group had R417.0m of debt, an increase on R1.00m, over one year. But it also has R1.46b in cash to offset that, meaning it has R1.05b net cash.

How Strong Is Mr Price Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mr Price Group had liabilities of R8.32b due within 12 months and liabilities of R6.80b due beyond that. Offsetting this, it had R1.46b in cash and R2.87b in receivables that were due within 12 months. So it has liabilities totalling R10.8b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Mr Price Group is worth R40.5b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Mr Price Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the other side of the story is that Mr Price Group saw its EBIT decline by 5.0% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its 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 Mr Price Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Mr Price Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Mr Price Group generated free cash flow amounting to a very robust 91% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While Mr Price Group does have more liabilities than liquid assets, it also has net cash of R1.05b. And it impressed us with free cash flow of R6.3b, being 91% of its EBIT. So we are not troubled with Mr Price Group's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Mr Price Group is showing 2 warning signs in our investment analysis , you should know about...

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.