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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Taylor Wimpey plc (LON:TW.) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. 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.
See our latest analysis for Taylor Wimpey
How Much Debt Does Taylor Wimpey Carry?
The image below, which you can click on for greater detail, shows that Taylor Wimpey had debt of UK£99.1m at the end of July 2021, a reduction from UK£104.5m over a year. However, its balance sheet shows it holds UK£1.01b in cash, so it actually has UK£906.5m net cash.
How Healthy Is Taylor Wimpey's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Taylor Wimpey had liabilities of UK£1.12b due within 12 months and liabilities of UK£895.5m due beyond that. Offsetting these obligations, it had cash of UK£1.01b as well as receivables valued at UK£154.8m due within 12 months. So it has liabilities totalling UK£857.0m more than its cash and near-term receivables, combined.
Of course, Taylor Wimpey has a market capitalization of UK£5.74b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Taylor Wimpey boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Taylor Wimpey has boosted its EBIT by 40%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Taylor Wimpey 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.