Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. We note that Bloomin’ Brands, Inc. (NASDAQ:BLMN) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is Bloomin’ Brands’s Debt?
As you can see below, Bloomin’ Brands had US$1.17b of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. On the flip side, it has US$64.7m in cash leading to net debt of about US$1.11b.
A Look At Bloomin’ Brands’s Liabilities
The latest balance sheet data shows that Bloomin’ Brands had liabilities of US$786.6m due within a year, and liabilities of US$2.57b falling due after that. Offsetting this, it had US$64.7m in cash and US$45.7m in receivables that were due within 12 months. So its liabilities total US$3.24b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the US$1.37b company, like a colossus towering over mere mortals. So we’d watch its balance sheet closely, without a doubt After all, Bloomin’ Brands would likely require a major re-capitalisation if it had to pay its creditors today.
In order to size up a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
Bloomin’ Brands’s debt is 2.8 times its EBITDA, and its EBIT cover its interest expense 4.2 times over. Taken together this implies that, while we wouldn’t want to see debt levels rise, we think it can handle its current leverage. However, one redeeming factor is that Bloomin’ Brands grew its EBIT at 12% over the last 12 months, boosting its ability to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Bloomin’ Brands’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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. In the last three years, Bloomin’ Brands’s free cash flow amounted to 44% of its EBIT, less than we’d expect. That’s not great, when it comes to paying down debt.
We’d go so far as to say Bloomin’ Brands’s level of total liabilities was disappointing. But on the bright side, its EBIT growth rate is a good sign, and makes us more optimistic. Overall, we think it’s fair to say that Bloomin’ Brands has enough debt that there are some real risks around the balance sheet. If everything goes well that may pay off but the downside of this debt is a greater risk of permanent losses. Given our hesitation about the stock, it would be good to know if Bloomin’ Brands insiders have sold any shares recently. You click here to find out if insiders have sold recently.
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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