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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, boohoo group plc (LON:BOO) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 boohoo group
What Is boohoo group's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of February 2022 boohoo group had UK£100.0m of debt, an increase on none, over one year. But it also has UK£101.3m in cash to offset that, meaning it has UK£1.30m net cash.
How Healthy Is boohoo group's Balance Sheet?
We can see from the most recent balance sheet that boohoo group had liabilities of UK£461.7m falling due within a year, and liabilities of UK£72.4m due beyond that. Offsetting this, it had UK£101.3m in cash and UK£65.8m in receivables that were due within 12 months. So it has liabilities totalling UK£367.0m more than its cash and near-term receivables, combined.
boohoo group has a market capitalization of UK£929.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, boohoo group boasts net cash, so it's fair to say it does not have a heavy debt load!
Importantly, boohoo group's EBIT fell a jaw-dropping 92% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if boohoo group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.