Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Myer Holdings Limited (ASX:MYR) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, 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 Myer Holdings

What Is Myer Holdings's Debt?

As you can see below, Myer Holdings had AU$56.9m of debt at January 2022, down from AU$75.4m a year prior. But it also has AU$274.1m in cash to offset that, meaning it has AU$217.2m net cash.

A Look At Myer Holdings' Liabilities

According to the last reported balance sheet, Myer Holdings had liabilities of AU$730.1m due within 12 months, and liabilities of AU$1.68b due beyond 12 months. Offsetting this, it had AU$274.1m in cash and AU$32.5m in receivables that were due within 12 months. So it has liabilities totalling AU$2.10b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the AU$266.9m 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, Myer Holdings would probably need a major re-capitalization if its creditors were to demand repayment. Given that Myer Holdings has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Notably, Myer Holdings's EBIT launched higher than Elon Musk, gaining a whopping 113% on last year. 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 Myer Holdings'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.