Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ 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. As with many other companies Manchester United plc (NYSE:MANU) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk? Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Manchester United
What Is Manchester United’s Net Debt? The chart below, which you can click on for greater detail, shows that Manchester United had UK£533.8m in debt in March 2021; about the same as the year before. On the flip side, it has UK£84.7m in cash leading to net debt of about UK£449.1m.
NYSE:MANU Debt to Equity History September 18th 2021 How Strong Is Manchester United’s Balance Sheet? We can see from the most recent balance sheet that Manchester United had liabilities of UK£366.8m falling due within a year, and liabilities of UK£579.2m due beyond that. Offsetting this, it had UK£84.7m in cash and UK£85.1m in receivables that were due within 12 months. So it has liabilities totalling UK£776.1m more than its cash and near-term receivables, combined.
This deficit isn’t so bad because Manchester United is worth UK£2.11b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Manchester United’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.
In the last year Manchester United had a loss before interest and tax, and actually shrunk its revenue by 14%, to UK£482m. That’s not what we would hope to see.
Caveat Emptor Not only did Manchester United’s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost UK£39m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled UK£20m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. Case in point: We’ve spotted 1 warning sign for Manchester United you should be aware of.
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.
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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.
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