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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Wynnstay Group Plc (LON:WYN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Wynnstay Group
What Is Wynnstay Group's Net Debt?
As you can see below, at the end of April 2019, Wynnstay Group had UK£11.7m of debt, up from UK£8.56m a year ago. Click the image for more detail. On the flip side, it has UK£423.0k in cash leading to net debt of about UK£11.2m.
How Strong Is Wynnstay Group's Balance Sheet?
According to the last reported balance sheet, Wynnstay Group had liabilities of UK£80.7m due within 12 months, and liabilities of UK£3.81m due beyond 12 months. Offsetting these obligations, it had cash of UK£423.0k as well as receivables valued at UK£86.8m due within 12 months. So it can boast UK£2.74m more liquid assets than total liabilities.
This surplus suggests that Wynnstay Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
Wynnstay Group's net debt is only 0.93 times its EBITDA. And its EBIT easily covers its interest expense, being 35.8 times the size. So we're pretty relaxed about its super-conservative use of debt. The good news is that Wynnstay Group has increased its EBIT by 2.6% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Wynnstay 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.