These 4 Measures Indicate That Crest Nicholson Holdings (LON:CRST) Is Using Debt Extensively
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Crest Nicholson Holdings plc (LON:CRST) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Crest Nicholson Holdings
What Is Crest Nicholson Holdings's Debt?
As you can see below, Crest Nicholson Holdings had UK£133.4m of debt at October 2019, down from UK£170.2m a year prior. However, its balance sheet shows it holds UK£171.6m in cash, so it actually has UK£38.2m net cash.
How Healthy Is Crest Nicholson Holdings's Balance Sheet?
We can see from the most recent balance sheet that Crest Nicholson Holdings had liabilities of UK£422.9m falling due within a year, and liabilities of UK£298.9m due beyond that. Offsetting this, it had UK£171.6m in cash and UK£141.8m in receivables that were due within 12 months. So it has liabilities totalling UK£408.4m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Crest Nicholson Holdings has a market capitalization of UK£1.23b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Crest Nicholson Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.
It is just as well that Crest Nicholson Holdings's load is not too heavy, because its EBIT was down 25% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Crest Nicholson Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Crest Nicholson Holdings 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. In the last three years, Crest Nicholson Holdings's free cash flow amounted to 38% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.
Summing up
Although Crest Nicholson Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of UK£38.2m. So while Crest Nicholson Holdings does not have a great balance sheet, it's certainly not too bad. 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. Take risks, for example - Crest Nicholson Holdings has 2 warning signs we think you should be aware of.
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
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