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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.' 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 Jersey Electricity plc (LON:JEL) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Jersey Electricity
How Much Debt Does Jersey Electricity Carry?
The chart below, which you can click on for greater detail, shows that Jersey Electricity had UK£30.2m in debt in September 2020; about the same as the year before. However, its balance sheet shows it holds UK£35.5m in cash, so it actually has UK£5.29m net cash.
A Look At Jersey Electricity's Liabilities
According to the last reported balance sheet, Jersey Electricity had liabilities of UK£21.1m due within 12 months, and liabilities of UK£83.0m due beyond 12 months. On the other hand, it had cash of UK£35.5m and UK£16.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£52.0m.
While this might seem like a lot, it is not so bad since Jersey Electricity has a market capitalization of UK£158.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Jersey Electricity boasts net cash, so it's fair to say it does not have a heavy debt load!
While Jersey Electricity doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jersey Electricity will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.