Does Ted Baker (LON: TED) have a healthy track record?

Howard Marks put it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We note that Ted Baker Plc (LON: TED) has debt on its balance sheet. But the most important question is: what risk does this debt create?

What risk does debt entail?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

Check out our latest analysis for Ted Baker

What is Ted Baker’s debt?

You can click on the graph below for historical figures, but it shows that as of August 2021, Ted Baker had £ 15.5million in debt, an increase from none, over a year. But on the other hand, he also has £ 28.2million in cash, which leads to a net cash position of £ 12.7million.

A look at Ted Baker’s responsibilities

The latest balance sheet data shows Ted Baker had a liability of £ 137.9million due within one year and a liability of £ 107.8million due after that. In compensation for these obligations, it had cash of £ 28.2 million as well as receivables valued at £ 74.7 million maturing within 12 months. His liabilities therefore total £ 142.7million more than the combination of his cash and short-term receivables.

This is a mountain of leverage compared to its market cap of £ 227.1million. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly. While he has some liabilities to note, Ted Baker also has more cash than debt, so we’re pretty confident he can handle his debt safely. When analyzing debt levels, the balance sheet is the obvious starting point. But it’s future profits, more than anything, that will determine Ted Baker’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 analyst earnings forecast report interesting.

Over 12 months, Ted Baker recorded a loss in EBIT and saw sales fall to £ 382million, a decrease of 21%. It makes us nervous, to say the least.

So how risky is Ted Baker?

Statistically speaking, businesses that lose money are riskier than those that earn it. And we note that Ted Baker has recorded a loss of earnings before interest and taxes (EBIT) over the past year. And during the same period it recorded a negative free cash outflow of £ 1.7million and a book loss of £ 33million. Given that it only has a net cash of £ 12.7million, the company may need to raise more capital if it does not hit breakeven soon. Overall we would say the stock is a bit risky and we are generally very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. Know that Ted Baker shows 3 warning signs in our investment analysis , and 2 of them should not be ignored …

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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