Warren Buffett said: “Volatility is far from synonymous with risk. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We can see that Mulberry Group plc (LON:MUL) uses debt in its business. But the more important question is: what risk does this debt create?

What risk does debt carry?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.

Check out our latest analysis for Mulberry Group

How much debt does the Mulberry group carry?

You can click on the chart below for historical figures, but it shows that in April 2022 Mulberry Group had £5.00m debt, an increase from £4.67m, over a year. But he also has £25.7m in cash to make up for that, meaning he has a net cash of £20.7m.

A look at the liabilities of the Mulberry group

According to the latest published balance sheet, Mulberry Group had liabilities of £41.7m due within 12 months and liabilities of £54.3m due beyond 12 months. As compensation for these obligations, it had cash of £25.7 million as well as receivables valued at £15.9 million maturing within 12 months. Thus, its liabilities outweigh the sum of its cash and (current) receivables of £54.4 million.

This shortfall is not that bad as Mulberry Group is worth £179.6m and could therefore probably raise enough capital to shore up its balance sheet, should the need arise. But it is clear that it must be carefully examined whether he can manage his debt without dilution. While it has liabilities to note, Mulberry Group also has more cash than debt, so we’re pretty confident it can manage its debt safely.

The story continues

Notably, Mulberry Group’s EBIT launched higher than Elon Musk, gaining a whopping 201% over last year. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; since Mulberry Group will need revenue to repay this debt. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.

Finally, a company can only repay its debts with cold hard cash, not with book profits. Mulberry Group may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and tax (EBIT) into free cash flow, as this will influence both its needs and its capacity. . to manage debt. Over the past two years, Mulberry Group has actually produced more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summary

Although Mulberry Group has more liabilities than liquid assets, it also has a net cash position of £20.7m. And it impressed us with free cash flow of £27m, or 169% of its EBIT. So is Mulberry Group’s debt a risk? This does not seem to us to be the case. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for Mulberry Group you should know.

If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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