In This Article:
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. We note that Capital Limited (LON:CAPD) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. 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, 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.
View our latest analysis for Capital
How Much Debt Does Capital Carry?
The image below, which you can click on for greater detail, shows that at June 2020 Capital had debt of US$15.6m, up from US$7.05m in one year. But on the other hand it also has US$38.8m in cash, leading to a US$23.2m net cash position.
How Healthy Is Capital's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Capital had liabilities of US$43.8m due within 12 months and liabilities of US$2.67m due beyond that. Offsetting these obligations, it had cash of US$38.8m as well as receivables valued at US$20.0m due within 12 months. So it actually has US$12.4m more liquid assets than total liabilities.
This surplus suggests that Capital has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Capital boasts net cash, so it's fair to say it does not have a heavy debt load!
The good news is that Capital has increased its EBIT by 8.4% over twelve months, which should ease any concerns about debt repayment. 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 Capital's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.