The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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. We note that Broadway Industrial Group Limited (SGX:B69) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is Broadway Industrial Group’s Debt?
As you can see below, Broadway Industrial Group had S$31.4m of debt at September 2019, down from S$41.2m a year prior. However, it also had S$12.7m in cash, and so its net debt is S$18.7m.
How Healthy Is Broadway Industrial Group’s Balance Sheet?
We can see from the most recent balance sheet that Broadway Industrial Group had liabilities of S$116.7m falling due within a year, and liabilities of S$5.71m due beyond that. Offsetting these obligations, it had cash of S$12.7m as well as receivables valued at S$43.2m due within 12 months. So its liabilities total S$66.5m more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the S$29.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Broadway Industrial Group would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can’t view debt in total isolation; since Broadway Industrial Group will need earnings to service that debt. So if you’re keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Broadway Industrial Group had negative earnings before interest and tax, and actually shrunk its revenue by 26%, to S$301m. To be frank that doesn’t bode well.
Not only did Broadway Industrial Group’s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping S$6.1m. When we look at that alongside the significant liabilities, we’re not particularly confident about the company. We’d want to see some strong near-term improvements before getting too interested in the stock. It’s fair to say the loss of S$9.8m didn’t encourage us either; we’d like to see a profit. In the meantime, we consider the stock to be risky. For riskier companies like Broadway Industrial Group I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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