Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that BHB Brauholding Bayern-Mitte AG (FRA:B9B) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
What Is BHB Brauholding Bayern-Mitte’s Debt?
You can click the graphic below for the historical numbers, but it shows that BHB Brauholding Bayern-Mitte had €431.8k of debt in December 2018, down from €510.0k, one year before But it also has €811.0k in cash to offset that, meaning it has €379.3k net cash.
How Strong Is BHB Brauholding Bayern-Mitte’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that BHB Brauholding Bayern-Mitte had liabilities of €1.74m due within 12 months and liabilities of €1.46m due beyond that. Offsetting these obligations, it had cash of €811.0k as well as receivables valued at €1.56m due within 12 months. So its liabilities total €832.1k more than the combination of its cash and short-term receivables.
Given BHB Brauholding Bayern-Mitte has a market capitalization of €9.18m, it’s hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. BHB Brauholding Bayern-Mitte boasts net cash, so it’s fair to say it does not have a heavy debt load!
The good news is that BHB Brauholding Bayern-Mitte has increased its EBIT by 8.2% over twelve months, which should ease any concerns about debt repayment. 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 BHB Brauholding Bayern-Mitte 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. BHB Brauholding Bayern-Mitte 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, BHB Brauholding Bayern-Mitte reported free cash flow worth 8.2% of its EBIT, which is really quite low. For us, cash conversion that low sparks some a little paranoia about is ability to extinguish debt.
While it is always sensible to look at a company’s total liabilities, it is very reassuring that BHB Brauholding Bayern-Mitte has €379k in net cash. And it also grew its EBIT by 8.2% over the last year. So we are not troubled with BHB Brauholding Bayern-Mitte’s debt use. Over time, share prices tend to follow earnings per share, so if you’re interested in BHB Brauholding Bayern-Mitte, you may well want to click here to check an interactive graph of its earnings per share history.
Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.