Warren Buffett said: “Volatility is far from synonymous with risk. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We can see that Ocado Group plc (LON:OCDO) uses debt in its business. But should shareholders worry about its use of debt?
When is debt a problem?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, many companies use debt to finance their growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Ocado Group
What is the net debt of the Ocado group?
As you can see below, at the end of November 2021, Ocado Group had a debt of £1.30 billion, up from £997.4 million a year ago. Click on the image for more details. However, he has £1.47 billion in cash to offset this, which translates to a net cash of £168.6 million.
A look at the liabilities of the Ocado group
We can see from the most recent balance sheet that the Ocado Group had liabilities of £467.0m due within a year, and liabilities of £2.21bn due beyond . As compensation for these obligations, it had cash of £1.47 billion as well as receivables valued at £324.2 million due within 12 months. Thus, its liabilities total £881.4 million more than the combination of its cash and short-term receivables.
Given that publicly traded Ocado Group shares are worth a very impressive total of £9.11 billion, it seems unlikely that this level of liabilities will pose a major threat. That said, it is clear that we must continue to monitor its record, lest it deteriorate. Despite its notable liabilities, Ocado Group has net cash, so it’s fair to say it’s not heavily leveraged! There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Ocado Group can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
On a 12-month basis, Ocado Group reported revenue of £2.5bn, a gain of 7.2%, although it reported no profit before interest and tax. We generally like to see faster growth from unprofitable businesses, but each in its own way.
So, how risky is the Ocado group?
Statistically speaking, businesses that lose money are riskier than those that make money. And over the past year, Ocado Group has posted a loss in earnings before interest and tax (EBIT), if truth be told. Indeed, during this period he spent £707million in cash and suffered a loss of £223million. But the saving grace is the UK’s £168.6m balance sheet. That means it could continue spending at its current rate for more than two years. Overall, we would say the stock is a bit risky and we are generally very cautious until we see positive free cash flow. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for Ocado Group you should know.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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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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