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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.' 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. As with many other companies Begbies Traynor Group plc (LON:BEG) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Begbies Traynor Group
What Is Begbies Traynor Group's Net Debt?
The image below, which you can click on for greater detail, shows that Begbies Traynor Group had debt of UK£7.00m at the end of October 2020, a reduction from UK£8.00m over a year. But it also has UK£7.67m in cash to offset that, meaning it has UK£672.0k net cash.
How Healthy Is Begbies Traynor Group's Balance Sheet?
We can see from the most recent balance sheet that Begbies Traynor Group had liabilities of UK£34.1m falling due within a year, and liabilities of UK£20.0m due beyond that. Offsetting this, it had UK£7.67m in cash and UK£34.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£12.1m.
Given Begbies Traynor Group has a market capitalization of UK£134.9m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Begbies Traynor Group also has more cash than debt, so we're pretty confident it can manage its debt safely.
Shareholders should be aware that Begbies Traynor Group's EBIT was down 58% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Begbies Traynor Group'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.