These 4 metrics indicate that the Go-Ahead Group (LON:GOG) is using debt reasonably well

Warren Buffett said: “Volatility is far from synonymous with risk. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Above all, The Go-Ahead Group plc (LON:GOG) is in debt. But should shareholders worry about its use of debt?

When is debt dangerous?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. In the worst case, a company can go bankrupt if it cannot pay its creditors. 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, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.

Check out our latest analysis for Go-Ahead Group

What is the debt of the Go-Ahead group?

The image below, which you can click on for more details, shows Go-Ahead Group had debt of £351.9m at the end of January 2022, a reduction from £409.0m over a year. But he also has £388.9m in cash to make up for that, meaning he has a net cash of £37.0m.

LSE: GOG Debt to Equity June 7, 2022

A Look at the Passives of the Go-Ahead Group

We can see from the most recent balance sheet that Go-Ahead Group had liabilities of £816.3m due within a year, and liabilities of £586.6m due to of the. On the other hand, it had cash of £388.9 million and £392.1 million of receivables due within a year. Thus, its liabilities total £621.9 million more than the combination of its cash and short-term receivables.

Given that this deficit is actually greater than the company’s market capitalization of £490.5m, we think shareholders really should be watching Go-Ahead Group’s debt levels, like a parent watching their child riding a bicycle for the first time. In the scenario where the company were to quickly clean up its balance sheet, it seems likely that shareholders would suffer significant dilution. Since Go-Ahead Group has more cash than debt, we’re pretty confident that it can manage its debt, despite having a lot of debt in total.

Above all, Go-Ahead Group has increased its EBIT by 70% over the last twelve months, and this growth will make it easier to manage its debt. 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 Go-Ahead 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.

Finally, a business needs free cash flow to pay off its debts; book profits are not enough. Go-Ahead 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 ability to manage debt. Fortunately for all shareholders, Go-Ahead Group has actually produced more free cash flow than EBIT for the past three years. There’s nothing better than cash coming in to stay in your lenders’ good books.

Summary

Although Go-Ahead Group’s balance sheet is not particularly strong, due to total liabilities, it is clearly positive to see that it has a net cash position of £37.0 million. And it impressed us with free cash flow of £380m, or 429% of its EBIT. So we have no problem with Go-Ahead Group’s use of debt. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we have identified 1 warning sign for the Go-Ahead group of which you should be aware.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.

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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