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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.' 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 Macfarlane Group PLC (LON:MACF) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
View our latest analysis for Macfarlane Group
How Much Debt Does Macfarlane Group Carry?
As you can see below, at the end of December 2021, Macfarlane Group had UK£9.84m of debt, up from UK£7.77m a year ago. Click the image for more detail. But on the other hand it also has UK£12.3m in cash, leading to a UK£2.48m net cash position.
How Healthy Is Macfarlane Group's Balance Sheet?
We can see from the most recent balance sheet that Macfarlane Group had liabilities of UK£79.7m falling due within a year, and liabilities of UK£41.6m due beyond that. Offsetting these obligations, it had cash of UK£12.3m as well as receivables valued at UK£57.0m due within 12 months. So its liabilities total UK£52.0m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Macfarlane Group is worth UK£198.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Macfarlane Group boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Macfarlane Group grew its EBIT by 48% over the last twelve months, and that growth will make it easier to handle its debt. 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 Macfarlane 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.