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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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Auto Trader Group plc (LON:AUTO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Auto Trader Group
How Much Debt Does Auto Trader Group Carry?
The image below, which you can click on for greater detail, shows that Auto Trader Group had debt of UK£27.6m at the end of March 2021, a reduction from UK£310.5m over a year. But it also has UK£45.7m in cash to offset that, meaning it has UK£18.1m net cash.
How Healthy Is Auto Trader Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Auto Trader Group had liabilities of UK£24.8m due within 12 months and liabilities of UK£51.0m due beyond that. On the other hand, it had cash of UK£45.7m and UK£57.0m worth of receivables due within a year. So it can boast UK£26.9m more liquid assets than total liabilities.
This state of affairs indicates that Auto Trader Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the UK£6.30b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Auto Trader Group has more cash than debt is arguably a good indication that it can manage its debt safely.
The modesty of its debt load may become crucial for Auto Trader Group if management cannot prevent a repeat of the 38% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Auto Trader 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.