Legendary fund manager Li Lu (who Charlie Munger backed) once said, ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Beasley Broadcast Group, Inc. (NASDAQ:BBGI) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company’s use of debt, we first look at cash and debt together.
Check out our latest analysis for Beasley Broadcast Group
What Is Beasley Broadcast Group’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2019 Beasley Broadcast Group had US$256.2m of debt, an increase on US$242.8m, over one year. However, it does have US$18.6m in cash offsetting this, leading to net debt of about US$237.6m.
How Strong Is Beasley Broadcast Group’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Beasley Broadcast Group had liabilities of US$53.2m due within 12 months and liabilities of US$422.4m due beyond that. Offsetting these obligations, it had cash of US$18.6m as well as receivables valued at US$54.6m due within 12 months. So its liabilities total US$402.4m more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the US$55.7m company, like a colossus towering over mere mortals. So we’d watch its balance sheet closely, without a doubt. At the end of the day, Beasley Broadcast Group would probably need a major re-capitalization if its creditors were to demand repayment.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Beasley Broadcast Group shareholders face the double whammy of a high net debt to EBITDA ratio (6.0), and fairly weak interest coverage, since EBIT is just 1.8 times the interest expense. This means we’d consider it to have a heavy debt load. Investors should also be troubled by the fact that Beasley Broadcast Group saw its EBIT drop by 18% over the last twelve months. If that’s the way things keep going handling the debt load will be like delivering hot coffees on a pogo stick. 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 Beasley Broadcast Group’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the most recent three years, Beasley Broadcast Group recorded free cash flow worth 52% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Our View
To be frank both Beasley Broadcast Group’s net debt to EBITDA and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least its conversion of EBIT to free cash flow is not so bad. Taking into account all the aforementioned factors, it looks like Beasley Broadcast Group has too much debt. That sort of riskiness is ok for some, but it certainly doesn’t float our boat. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We’ve spotted 5 warning signs for Beasley Broadcast Group you should be aware of, and 1 of them doesn’t sit too well with us.
Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
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