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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Capital Limited (LON:CAPD) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Capital
How Much Debt Does Capital Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2022 Capital had US$58.4m of debt, an increase on US$52.8m, over one year. But it also has US$70.0m in cash to offset that, meaning it has US$11.6m net cash.
How Healthy Is Capital's Balance Sheet?
We can see from the most recent balance sheet that Capital had liabilities of US$83.3m falling due within a year, and liabilities of US$47.3m due beyond that. On the other hand, it had cash of US$70.0m and US$43.5m worth of receivables due within a year. So its liabilities total US$17.1m more than the combination of its cash and short-term receivables.
Of course, Capital has a market capitalization of US$184.0m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Capital also has more cash than debt, so we're pretty confident it can manage its debt safely.
In addition to that, we're happy to report that Capital has boosted its EBIT by 83%, thus reducing the spectre of future debt repayments. 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 Capital 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.