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.' 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 note that Augean plc (LON:AUG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Augean
How Much Debt Does Augean Carry?
You can click the graphic below for the historical numbers, but it shows that Augean had UK£2.94m of debt in June 2019, down from UK£7.90m, one year before. However, it does have UK£25.8m in cash offsetting this, leading to net cash of UK£22.8m.
How Strong Is Augean's Balance Sheet?
The latest balance sheet data shows that Augean had liabilities of UK£31.7m due within a year, and liabilities of UK£12.0m falling due after that. Offsetting these obligations, it had cash of UK£25.8m as well as receivables valued at UK£20.0m due within 12 months. So it actually has UK£2.08m more liquid assets than total liabilities.
This state of affairs indicates that Augean's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the UK£106.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Augean has more cash than debt is arguably a good indication that it can manage its debt safely.
On top of that, Augean grew its EBIT by 83% over the last twelve months, and that growth will make it easier to handle its debt. 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 Augean 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.