Here's Why Beacon Lighting Group (ASX:BLX) Can Manage Its Debt Responsibly

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. As with many other companies Beacon Lighting Group Limited (ASX:BLX) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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.

See our latest analysis for Beacon Lighting Group

What Is Beacon Lighting Group's Debt?

The image below, which you can click on for greater detail, shows that Beacon Lighting Group had debt of AU$20.9m at the end of December 2021, a reduction from AU$21.8m over a year. But it also has AU$34.2m in cash to offset that, meaning it has AU$13.3m net cash.

A Look At Beacon Lighting Group's Liabilities

According to the last reported balance sheet, Beacon Lighting Group had liabilities of AU$91.9m due within 12 months, and liabilities of AU$102.4m due beyond 12 months. Offsetting this, it had AU$34.2m in cash and AU$8.32m in receivables that were due within 12 months. So its liabilities total AU$151.8m more than the combination of its cash and short-term receivables.

Beacon Lighting Group has a market capitalization of AU$381.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Beacon Lighting Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Beacon Lighting Group grew its EBIT by 17% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Beacon Lighting 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Beacon Lighting Group 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. Over the last three years, Beacon Lighting Group recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While Beacon Lighting Group does have more liabilities than liquid assets, it also has net cash of AU$13.3m. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in AU$43m. So is Beacon Lighting 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. However, not all investment risk resides within the balance sheet - far from it. For example Beacon Lighting Group has 3 warning signs (and 1 which is concerning) we think you should know about.

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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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.