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Warren Buffett famously said, '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. We can see that Andrews Sykes Group plc (LON:ASY) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Andrews Sykes Group
How Much Debt Does Andrews Sykes Group Carry?
You can click the graphic below for the historical numbers, but it shows that Andrews Sykes Group had UK£3.49m of debt in December 2020, down from UK£3.98m, one year before. But on the other hand it also has UK£24.0m in cash, leading to a UK£20.5m net cash position.
How Strong Is Andrews Sykes Group's Balance Sheet?
We can see from the most recent balance sheet that Andrews Sykes Group had liabilities of UK£16.6m falling due within a year, and liabilities of UK£13.2m due beyond that. Offsetting this, it had UK£24.0m in cash and UK£17.3m in receivables that were due within 12 months. So it can boast UK£11.5m more liquid assets than total liabilities.
This surplus suggests that Andrews Sykes Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Andrews Sykes Group boasts net cash, so it's fair to say it does not have a heavy debt load!
But the bad news is that Andrews Sykes Group has seen its EBIT plunge 15% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Andrews Sykes Group 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.