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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. 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 can see that Johns Lyng Group Limited (ASX:JLG) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Johns Lyng Group
What Is Johns Lyng Group's Debt?
You can click the graphic below for the historical numbers, but it shows that Johns Lyng Group had AU$829.0k of debt in June 2019, down from AU$4.42m, one year before. However, it does have AU$30.1m in cash offsetting this, leading to net cash of AU$29.2m.
A Look At Johns Lyng Group's Liabilities
According to the last reported balance sheet, Johns Lyng Group had liabilities of AU$86.3m due within 12 months, and liabilities of AU$3.24m due beyond 12 months. Offsetting this, it had AU$30.1m in cash and AU$79.7m in receivables that were due within 12 months. So it actually has AU$20.3m more liquid assets than total liabilities.
This surplus suggests that Johns Lyng Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Johns Lyng Group has more cash than debt is arguably a good indication that it can manage its debt safely.
On the other hand, Johns Lyng Group's EBIT dived 12%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 Johns Lyng Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.