These 4 Measures Indicate That Beach Energy (ASX:BPT) Is Using Debt Reasonably Well

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 can see that Beach Energy Limited (ASX:BPT) does use debt in its business. 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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Beach Energy

What Is Beach Energy's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Beach Energy had AU$136.8m of debt in December 2021, down from AU$158.0m, one year before. However, it does have AU$213.2m in cash offsetting this, leading to net cash of AU$76.4m.

How Healthy Is Beach Energy's Balance Sheet?

According to the last reported balance sheet, Beach Energy had liabilities of AU$425.9m due within 12 months, and liabilities of AU$1.19b due beyond 12 months. On the other hand, it had cash of AU$213.2m and AU$224.7m worth of receivables due within a year. So its liabilities total AU$1.17b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Beach Energy is worth AU$3.80b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Beach Energy also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Beach Energy has been able to increase its EBIT by 23% in twelve months, making it easier to pay down 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 Beach Energy'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Beach Energy may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Beach Energy's free cash flow amounted to 27% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

Although Beach Energy's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of AU$76.4m. And we liked the look of last year's 23% year-on-year EBIT growth. So we are not troubled with Beach Energy's debt use. We'd be motivated to research the stock further if we found out that Beach Energy insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.