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 Coral Products plc (LON:CRU) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 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, 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 Coral Products

How Much Debt Does Coral Products Carry?

The image below, which you can click on for greater detail, shows that Coral Products had debt of UK£1.35m at the end of April 2021, a reduction from UK£2.98m over a year. But on the other hand it also has UK£3.84m in cash, leading to a UK£2.49m net cash position.

A Look At Coral Products' Liabilities

We can see from the most recent balance sheet that Coral Products had liabilities of UK£3.85m falling due within a year, and liabilities of UK£1.35m due beyond that. Offsetting this, it had UK£3.84m in cash and UK£4.11m in receivables that were due within 12 months. So it can boast UK£2.75m more liquid assets than total liabilities.

This surplus suggests that Coral Products is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Coral Products has more cash than debt is arguably a good indication that it can manage its debt safely.

Notably, Coral Products's EBIT launched higher than Elon Musk, gaining a whopping 817% on last year. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Coral Products can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Coral Products 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. Happily for any shareholders, Coral Products actually produced more free cash flow than EBIT over the last three years. 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 it is always sensible to investigate a company's debt, in this case Coral Products has UK£2.49m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of UK£1.4m, being 336% of its EBIT. So we don't think Coral Products's use of debt is risky. 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. For instance, we've identified 2 warning signs for Coral Products that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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