Barco (EBR:BAR) Seems To Use Debt Quite Sensibly

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.' 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 note that Barco NV (EBR:BAR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

We check all companies for important risks. See what we found for Barco in our free report.

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. 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. 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.

What Is Barco's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Barco had €64.9m of debt, an increase on €19.2m, over one year. But it also has €363.0m in cash to offset that, meaning it has €298.0m net cash.

How Strong Is Barco's Balance Sheet?

We can see from the most recent balance sheet that Barco had liabilities of €306.0m falling due within a year, and liabilities of €127.7m due beyond that. Offsetting these obligations, it had cash of €363.0m as well as receivables valued at €213.9m due within 12 months. So it can boast €143.2m more liquid assets than total liabilities.

This surplus suggests that Barco has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Barco has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Barco

The modesty of its debt load may become crucial for Barco if management cannot prevent a repeat of the 38% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Barco 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. Barco 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 most recent three years, Barco recorded free cash flow worth 61% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Barco has net cash of €298.0m, as well as more liquid assets than liabilities. So we are not troubled with Barco's debt use. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Barco's dividend history, without delay!

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.