Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. 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. Importantly, 1st Group Limited (ASX:1ST) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for 1st Group
What Is 1st Group's Debt?
The image below, which you can click on for greater detail, shows that at June 2019 1st Group had debt of AU$1.84m, up from AU$964.9k in one year. However, it does have AU$2.77m in cash offsetting this, leading to net cash of AU$936.8k.
A Look At 1st Group's Liabilities
The latest balance sheet data shows that 1st Group had liabilities of AU$1.74m due within a year, and liabilities of AU$2.14m falling due after that. On the other hand, it had cash of AU$2.77m and AU$554.0k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$553.8k.
Of course, 1st Group has a market capitalization of AU$22.0m, so these liabilities are probably manageable. 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, 1st 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 you can't view debt in total isolation; since 1st Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, 1st Group reported revenue of AU$4.0m, which is a gain of 15%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.