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.' 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. Importantly, Moneysupermarket.com Group PLC (LON:MONY) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Moneysupermarket.com Group's Debt?
As you can see below, Moneysupermarket.com Group had UK£3.10m of debt at June 2020, down from UK£25.0m a year prior. But it also has UK£12.5m in cash to offset that, meaning it has UK£9.40m net cash.
A Look At Moneysupermarket.com Group's Liabilities
According to the last reported balance sheet, Moneysupermarket.com Group had liabilities of UK£59.7m due within 12 months, and liabilities of UK£45.8m due beyond 12 months. Offsetting this, it had UK£12.5m in cash and UK£50.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£42.7m.
Since publicly traded Moneysupermarket.com Group shares are worth a total of UK£1.43b, 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, Moneysupermarket.com Group also has more cash than debt, so we're pretty confident it can manage its debt safely.
But the other side of the story is that Moneysupermarket.com Group saw its EBIT decline by 7.9% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Moneysupermarket.com 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Moneysupermarket.com Group 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, Moneysupermarket.com Group recorded free cash flow worth 80% 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.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Moneysupermarket.com Group has UK£9.40m in net cash. The cherry on top was that in converted 80% of that EBIT to free cash flow, bringing in UK£90m. So is Moneysupermarket.com Group's debt a risk? It doesn't seem so to us. We'd be motivated to research the stock further if we found out that Moneysupermarket.com Group insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
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. 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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