Yahoo Finance We Think Auto Trader Group (LON:AUTO) Can Stay On Top Of Its 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.' 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 note that Auto Trader Group plc (LON:AUTO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Auto Trader Group
How Much Debt Does Auto Trader Group Carry?
The image below, which you can click on for greater detail, shows that Auto Trader Group had debt of UK£27.6m at the end of March 2021, a reduction from UK£310.5m over a year. But it also has UK£45.7m in cash to offset that, meaning it has UK£18.1m net cash.
How Healthy Is Auto Trader Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Auto Trader Group had liabilities of UK£24.8m due within 12 months and liabilities of UK£51.0m due beyond that. On the other hand, it had cash of UK£45.7m and UK£57.0m worth of receivables due within a year. So it can boast UK£26.9m more liquid assets than total liabilities.
This state of affairs indicates that Auto Trader Group'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£6.30b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Auto Trader Group has more cash than debt is arguably a good indication that it can manage its debt safely.
The modesty of its debt load may become crucial for Auto Trader Group if management cannot prevent a repeat of the 38% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Auto Trader Group 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Auto Trader Group 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. Over the last three years, Auto Trader Group recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Auto Trader Group has net cash of UK£18.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of UK£123m, being 81% of its EBIT. So we don't have any problem with Auto Trader Group's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Auto Trader Group's earnings per share history for free.
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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