We Think Breville Group (ASX:BRG) Can Stay On Top Of Its Debt

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.' 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 Breville Group Limited (ASX:BRG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Breville Group

What Is Breville Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Breville Group had AU$146.4m of debt, an increase on AU$14.8m, over one year. But on the other hand it also has AU$178.1m in cash, leading to a AU$31.7m net cash position.

How Healthy Is Breville Group's Balance Sheet?

We can see from the most recent balance sheet that Breville Group had liabilities of AU$398.2m falling due within a year, and liabilities of AU$188.4m due beyond that. On the other hand, it had cash of AU$178.1m and AU$375.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$33.0m.

Having regard to Breville Group's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the AU$2.40b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Breville Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Breville Group grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Breville Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Breville Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Breville Group's free cash flow amounted to 37% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Breville Group has AU$31.7m in net cash. And we liked the look of last year's 27% year-on-year EBIT growth. So is Breville Group's debt a risk? It doesn't seem so to us. 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. To that end, you should learn about the 2 warning signs we've spotted with Breville Group (including 1 which is significant) .

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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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.