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. We note that The Citadel Group Limited (ASX:CGL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Citadel Group
What Is Citadel Group's Debt?
You can click the graphic below for the historical numbers, but it shows that Citadel Group had AU$15.0m of debt in December 2018, down from AU$19.8m, one year before. However, its balance sheet shows it holds AU$16.0m in cash, so it actually has AU$989.0k net cash.
A Look At Citadel Group's Liabilities
Zooming in on the latest balance sheet data, we can see that Citadel Group had liabilities of AU$36.2m due within 12 months and liabilities of AU$20.8m due beyond that. Offsetting these obligations, it had cash of AU$16.0m as well as receivables valued at AU$33.6m due within 12 months. So its liabilities total AU$7.43m more than the combination of its cash and short-term receivables.
Given Citadel Group has a market capitalization of AU$224.6m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Citadel Group boasts net cash, so it's fair to say it does not have a heavy debt load!
Also good is that Citadel Group grew its EBIT at 11% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Citadel 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.