Yahoo Finance Is Countryside Properties (LON:CSP) Using Too Much Debt?
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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Countryside Properties PLC (LON:CSP) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Countryside Properties
What Is Countryside Properties's Debt?
As you can see below, at the end of September 2020, Countryside Properties had UK£2.30m of debt, up from UK£2.20m a year ago. Click the image for more detail. But on the other hand it also has UK£100.5m in cash, leading to a UK£98.2m net cash position.
How Strong Is Countryside Properties' Balance Sheet?
The latest balance sheet data shows that Countryside Properties had liabilities of UK£361.4m due within a year, and liabilities of UK£162.4m falling due after that. Offsetting this, it had UK£100.5m in cash and UK£162.5m in receivables that were due within 12 months. So its liabilities total UK£260.8m more than the combination of its cash and short-term receivables.
Since publicly traded Countryside Properties shares are worth a total of UK£2.36b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Countryside Properties also has more cash than debt, so we're pretty confident it can manage its debt safely.
In fact Countryside Properties's saving grace is its low debt levels, because its EBIT has tanked 78% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Countryside Properties can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Countryside Properties has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Considering the last three years, Countryside Properties actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.
Summing up
Although Countryside Properties's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of UK£98.2m. So although we see some areas for improvement, we're not too worried about Countryside Properties's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Countryside Properties you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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