Yahoo Finance James Halstead (LON:JHD) Seems To Use Debt Rather Sparingly
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 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 note that James Halstead plc (LON:JHD) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for James Halstead
How Much Debt Does James Halstead Carry?
The chart below, which you can click on for greater detail, shows that James Halstead had UK£200.0k in debt in June 2019; about the same as the year before. But on the other hand it also has UK£68.7m in cash, leading to a UK£68.5m net cash position.
How Healthy Is James Halstead's Balance Sheet?
According to the last reported balance sheet, James Halstead had liabilities of UK£62.5m due within 12 months, and liabilities of UK£20.2m due beyond 12 months. Offsetting these obligations, it had cash of UK£68.7m as well as receivables valued at UK£32.8m due within 12 months. So it actually has UK£18.8m more liquid assets than total liabilities.
This state of affairs indicates that James Halstead's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the UK£1.07b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, James Halstead boasts net cash, so it's fair to say it does not have a heavy debt load!
The good news is that James Halstead has increased its EBIT by 3.8% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if James Halstead can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. James Halstead may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, James Halstead recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing up
While it is always sensible to investigate a company's debt, in this case James Halstead has UK£68.5m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of UK£46m, being 73% of its EBIT. So is James Halstead's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in James Halstead would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
