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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that The Parkmead Group Plc (LON:PMG) does use debt in its business. But should shareholders be worried about its use of debt?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Parkmead Group
How Much Debt Does Parkmead Group Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 Parkmead Group had UK£2.41m of debt, an increase on none, over one year. But it also has UK£25.7m in cash to offset that, meaning it has UK£23.3m net cash.
How Healthy Is Parkmead Group's Balance Sheet?
According to the last reported balance sheet, Parkmead Group had liabilities of UK£4.44m due within 12 months, and liabilities of UK£14.0m due beyond 12 months. Offsetting this, it had UK£25.7m in cash and UK£1.41m in receivables that were due within 12 months. So it can boast UK£8.66m more liquid assets than total liabilities.
This surplus suggests that Parkmead Group is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Parkmead Group has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Parkmead 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.
Over 12 months, Parkmead Group made a loss at the EBIT level, and saw its revenue drop to UK£4.1m, which is a fall of 51%. To be frank that doesn't bode well.