In This Article:
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that Shaver Shop Group Limited (ASX:SSG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Shaver Shop Group
What Is Shaver Shop Group's Net Debt?
As you can see below, Shaver Shop Group had AU$10.3m of debt at June 2019, down from AU$11.3m a year prior. However, it also had AU$3.94m in cash, and so its net debt is AU$6.38m.
A Look At Shaver Shop Group's Liabilities
The latest balance sheet data shows that Shaver Shop Group had liabilities of AU$19.2m due within a year, and liabilities of AU$13.3m falling due after that. Offsetting this, it had AU$3.94m in cash and AU$3.11m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$25.5m.
This deficit isn't so bad because Shaver Shop Group is worth AU$74.6m, 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.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Shaver Shop Group's net debt is only 0.51 times its EBITDA. And its EBIT covers its interest expense a whopping 17.3 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. While Shaver Shop Group doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shaver Shop Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.