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. We can see that A.G. BARR p.l.c. (LON:BAG) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for A.G. BARR

What Is A.G. BARR's Debt?

You can click the graphic below for the historical numbers, but it shows that as of January 2021 A.G. BARR had UK£2.90m of debt, an increase on none, over one year. However, it does have UK£52.9m in cash offsetting this, leading to net cash of UK£50.0m.

How Healthy Is A.G. BARR's Balance Sheet?

The latest balance sheet data shows that A.G. BARR had liabilities of UK£49.4m due within a year, and liabilities of UK£23.9m falling due after that. On the other hand, it had cash of UK£52.9m and UK£38.3m worth of receivables due within a year. So it actually has UK£17.9m more liquid assets than total liabilities.

This short term liquidity is a sign that A.G. BARR could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that A.G. BARR has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, A.G. BARR's EBIT dived 12%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if A.G. BARR 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.