Is Equals Group (LON: EQLS) using too much debt?

Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu doesn’t care when he says, “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital ”. It is natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. We can see that Equals Group plc (LON: EQLS) uses debt in its business. But should shareholders be worried about its use of debt?

When is debt dangerous?

Debt helps a business until it struggles to pay it off, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is where a company has to issue shares at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first look at cash and debt levels, together.

Check out our latest analysis for Equals Group

What is Equals Group debt?

The image below, which you can click for more details, shows that as of December 2020, Equals Group was in debt of £ 2.00million in the UK, up from none in a year. But he also has £ 10.0million in cash to make up for that, meaning he has a net cash of £ 8.03million in the UK.

How healthy is Equals Group’s balance sheet?

According to the latest published balance sheet, Equals Group had liabilities of £ 16.1million due within 12 months and liabilities of £ 11.2million beyond 12 months. In return for these obligations, he had cash of £ 10.0 million as well as receivables valued at £ 11.0 million with a 12-month maturity. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of £ 6.32 million.

Given that Equals Group’s listed shares are worth a total of £ 77.8million, it seems unlikely that this level of liabilities is a major threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. Despite its notable liabilities, Equals Group has a net cash flow, so it’s fair to say it doesn’t have a heavy debt! The balance sheet is clearly the area to focus on when analyzing debt. But it is future profits, more than anything, that will determine Equals Group’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.

In the past year, Equals Group has recorded a loss before interest and taxes and in fact reduced its turnover by 6.4% to £ 29million. We would much prefer to see the growth.

So how risky is Equals Group?

We are convinced that loss-making companies are, in general, riskier than profitable ones. And the point is, over the past twelve months, Equals Group has lost money in earnings before interest and taxes (EBIT). Indeed, during this period he burned £ 1.8million in the UK and recorded a loss of £ 6.9million in the UK. With just £ 8.03million on the balance sheet, it looks like we’re going to have to raise capital again soon. In summary, we’re a little skeptical about this one, as it looks pretty risky in the absence of free cash flow. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. Note that Equals Group displays 1 warning sign in our investment analysis , you should know …

If, after all of that, you’re more interested in a fast-growing company with a rock-solid balance sheet, then take a quick look at our list of cash-flow-growing stocks.

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