Here's Why Barco (EBR:BAR) Can Manage Its Debt Responsibly

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Barco NV (EBR:BAR) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

Our analysis indicates that BAR is potentially undervalued!

What Is Barco's Debt?

The chart below, which you can click on for greater detail, shows that Barco had €48.5m in debt in June 2022; about the same as the year before. But it also has €282.1m in cash to offset that, meaning it has €233.6m net cash.

How Strong Is Barco's Balance Sheet?

We can see from the most recent balance sheet that Barco had liabilities of €275.9m falling due within a year, and liabilities of €120.6m due beyond that. Offsetting this, it had €282.1m in cash and €211.6m in receivables that were due within 12 months. So it can boast €97.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Barco could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Barco has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Barco made a loss at the EBIT level, last year, it was also good to see that it generated €33m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Barco can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Barco 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 year, Barco'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

While we empathize with investors who find debt concerning, you should keep in mind that Barco has net cash of €233.6m, as well as more liquid assets than liabilities. So we don't have any problem with Barco's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Barco's earnings per share history for free.

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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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.