We Think Barco (EBR:BAR) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Barco NV (EBR:BAR) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Barco

How Much Debt Does Barco Carry?

As you can see below, Barco had €21.3m of debt at December 2020, down from €25.6m a year prior. However, it does have €238.6m in cash offsetting this, leading to net cash of €217.3m.

How Healthy Is Barco's Balance Sheet?

The latest balance sheet data shows that Barco had liabilities of €197.1m due within a year, and liabilities of €124.0m falling due after that. Offsetting these obligations, it had cash of €238.6m as well as receivables valued at €158.6m due within 12 months. So it can boast €76.1m 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. Succinctly put, Barco boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Barco's load is not too heavy, because its EBIT was down 91% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Barco'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, Barco produced sturdy free cash flow equating to 59% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Barco has net cash of €217.3m, as well as more liquid assets than liabilities. So we don't have any problem with Barco's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Barco is showing 1 warning sign in our investment analysis , 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. 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.
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