Ebiquity (LON:EBQ) has good debt
Some say volatility, rather than debt, is the best way to think about risk as an investor, but 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 Ebiquity plc (LON:EBQ) uses debt in its business. But the real question is whether this debt makes the business risky.
Why is debt risky?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own 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 costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest analysis for Ebiquity
How much debt does Ebiquity bear?
You can click on the chart below for historical figures, but it shows Ebiquity had £17.9m in debt in December 2021, up from £19.6m a year earlier. However, he also had £13.1m in cash, so his net debt is £4.77m.
How strong is Ebiquity’s balance sheet?
According to the latest published balance sheet, Ebiquity had liabilities of £29.1m due within 12 months and liabilities of £23.4m due beyond 12 months. On the other hand, it had cash of £13.1 million and £22.1 million of receivables due within the year. It therefore has liabilities totaling £17.3 million more than its cash and short-term receivables, combined.
While that might sound like a lot, it’s not too bad since Ebiquity has a market capitalization of £52.1m, so it could probably bolster its balance sheet by raising capital if needed. But it is clear that it must be carefully examined whether he can manage his debt without dilution. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Ebiquity’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Last year, Ebiquity was not profitable on an EBIT level, but managed to increase its turnover by 13%, to £63 million. We generally like to see faster growth from unprofitable businesses, but each in its own way.
Over the last twelve months, Ebiquity has recorded a loss of earnings before interest and taxes (EBIT). Indeed, it lost £5.1 million in EBIT. Considering that alongside the liabilities mentioned above, this doesn’t give us much confidence that the company should use so much debt. So we think its balance sheet is a little stretched, but not beyond repair. We’d feel better if he turned his £7.0m year-over-year loss into a profit. In short, it’s a really risky title. 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. For example Ebiquity has 2 warning signs (and 1 that makes us a little uneasy) we think you should know.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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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.