Tasty (LON:TAST) has debt but no income; Should you be worried?

Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Mostly, Tasty PLC (LON:TAST) is in debt. But does this debt worry shareholders?

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. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.

See our latest analysis for Tasty

What is Tasty’s net debt?

You can click on the graph below for historical figures, but it shows that in December 2021 Tasty had debt of £1.25m, an increase of none, year on year. However, he has £11.0m in cash to make up for that, resulting in a net cash of £9.76m.

AIM: TAST Debt to Equity March 25, 2022

A look at Tasty’s responsibilities

Zooming in on the latest balance sheet data, we can see that Tasty had liabilities of £12.8m due within 12 months and liabilities of £51.5m due beyond. In return, he had £11.0m in cash and £211.0k in receivables due within 12 months. Thus, its liabilities total £53.1 million more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the £7.76million British company itself, like a child struggling under the weight of a huge rucksack full of books, his sports gear and a trumpet. We would therefore be watching his balance sheet closely, no doubt. Ultimately, Tasty would likely need a major recapitalization if its creditors were to demand repayment. Since Tasty has more cash than debt, we’re pretty confident he can manage his debt, despite having a lot of debt overall. The balance sheet is clearly the area to focus on when analyzing debt. But it is Tasty’s earnings that will influence the balance sheet going forward. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

Over 12 months, Tasty reported sales of £35m, a 44% gain, although it reported no profit before interest and tax. The shareholders probably have their fingers crossed that she can make a profit.

So how risky is the taste?

Although Tasty has posted a loss of earnings before interest and tax (EBIT) over the last twelve months, it has made a statutory profit of £1.2 million. So taking that at face value, and considering the money, we don’t think it’s very risky in the short term. One bright spot was revenue growth of 44% over last year. But we sincerely believe that the balance sheet is risky. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. To this end, you should be aware of the 2 warning signs we spotted with Tasty.

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.

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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