Yahoo Finance Is Creightons (LON:CRL) Using Too Much Debt?
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. We can see that Creightons Plc (LON:CRL) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Creightons
How Much Debt Does Creightons Carry?
As you can see below, Creightons had UK£2.81m of debt at March 2021, down from UK£3.53m a year prior. However, it does have UK£6.56m in cash offsetting this, leading to net cash of UK£3.75m.
How Healthy Is Creightons' Balance Sheet?
We can see from the most recent balance sheet that Creightons had liabilities of UK£9.91m falling due within a year, and liabilities of UK£3.55m due beyond that. Offsetting this, it had UK£6.56m in cash and UK£9.91m in receivables that were due within 12 months. So it can boast UK£3.01m more liquid assets than total liabilities.
This short term liquidity is a sign that Creightons could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Creightons has more cash than debt is arguably a good indication that it can manage its debt safely.
On top of that, Creightons grew its EBIT by 64% 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 you can't view debt in total isolation; since Creightons will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Creightons 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. In the last three years, Creightons's free cash flow amounted to 36% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing up
While it is always sensible to investigate a company's debt, in this case Creightons has UK£3.75m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 64% over the last year. So we don't think Creightons's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Creightons .
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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