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.' 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. As with many other companies Burberry Group plc (LON:BRBY) makes use of debt. But the real question is whether this debt is making the company risky.

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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Burberry Group

What Is Burberry Group's Debt?

As you can see below, Burberry Group had UK£342.5m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds UK£1.26b in cash, so it actually has UK£918.8m net cash.

How Healthy Is Burberry Group's Balance Sheet?

The latest balance sheet data shows that Burberry Group had liabilities of UK£702.8m due within a year, and liabilities of UK£1.24b falling due after that. Offsetting these obligations, it had cash of UK£1.26b as well as receivables valued at UK£277.0m due within 12 months. So it has liabilities totalling UK£404.2m more than its cash and near-term receivables, combined.

Of course, Burberry Group has a titanic market capitalization of UK£8.32b, 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. While it does have liabilities worth noting, Burberry Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Burberry Group saw its EBIT drop by 5.4% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Burberry 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.