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Does Andrews Sykes Group (LON:ASY) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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. We can see that Andrews Sykes Group plc (LON:ASY) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Andrews Sykes Group

What Is Andrews Sykes Group's Debt?

As you can see below, Andrews Sykes Group had UK£3.00m of debt at December 2021, down from UK£3.49m a year prior. But on the other hand it also has UK£32.4m in cash, leading to a UK£29.4m net cash position.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Andrews Sykes Group's Balance Sheet?

According to the last reported balance sheet, Andrews Sykes Group had liabilities of UK£19.5m due within 12 months, and liabilities of UK£14.3m due beyond 12 months. Offsetting this, it had UK£32.4m in cash and UK£19.8m in receivables that were due within 12 months. So it can boast UK£18.5m more liquid assets than total liabilities.

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This surplus suggests that Andrews Sykes Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Andrews Sykes Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Andrews Sykes Group grew its EBIT by 36% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Andrews Sykes Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Andrews Sykes 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 last three years, Andrews Sykes Group recorded free cash flow worth a fulsome 95% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Andrews Sykes Group has net cash of UK£29.4m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of UK£21m, being 95% of its EBIT. So we don't think Andrews Sykes Group's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Andrews Sykes Group has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.