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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Roebuck Food Group plc (LON:RFG) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. 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 think about a company's use of debt, we first look at cash and debt together.
What Is Roebuck Food Group's Debt?
You can click the graphic below for the historical numbers, but it shows that Roebuck Food Group had UK£2.23m of debt in December 2021, down from UK£5.04m, one year before. However, its balance sheet shows it holds UK£4.54m in cash, so it actually has UK£2.32m net cash.
How Healthy Is Roebuck Food Group's Balance Sheet?
The latest balance sheet data shows that Roebuck Food Group had liabilities of UK£6.80m due within a year, and liabilities of UK£829.0k falling due after that. Offsetting these obligations, it had cash of UK£4.54m as well as receivables valued at UK£3.89m due within 12 months. So it can boast UK£800.0k more liquid assets than total liabilities.
It's good to see that Roebuck Food Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Roebuck Food Group has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Roebuck Food Group 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.
In the last year Roebuck Food Group wasn't profitable at an EBIT level, but managed to grow its revenue by 30%, to UK£24m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Roebuck Food Group?
Although Roebuck Food Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of UK£1.2m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Keeping in mind its 30% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Roebuck Food Group you should be aware of, and 1 of them can't be ignored.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.