Stock Analysis

Is Beston Global Food (ASX:BFC) A Risky Investment?

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ASX:BFC
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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.' 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. Importantly, Beston Global Food Company Limited (ASX:BFC) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Beston Global Food

How Much Debt Does Beston Global Food Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Beston Global Food had AU$47.7m of debt, an increase on AU$39.8m, over one year. However, because it has a cash reserve of AU$10.6m, its net debt is less, at about AU$37.1m.

debt-equity-history-analysis
ASX:BFC Debt to Equity History December 15th 2020

A Look At Beston Global Food's Liabilities

Zooming in on the latest balance sheet data, we can see that Beston Global Food had liabilities of AU$40.6m due within 12 months and liabilities of AU$24.8m due beyond that. Offsetting these obligations, it had cash of AU$10.6m as well as receivables valued at AU$11.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$42.9m.

This is a mountain of leverage relative to its market capitalization of AU$53.0m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is Beston Global Food's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Beston Global Food wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to AU$103m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Beston Global Food still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable AU$19m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled AU$20m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 5 warning signs with Beston Global Food (at least 2 which are significant) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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