Does Bang & Olufsen (CPH:BO) Have A Healthy Balance Sheet?

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.' 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 Bang & Olufsen a/s (CPH:BO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Our analysis indicates that BO is potentially undervalued!

How Much Debt Does Bang & Olufsen Carry?

As you can see below, at the end of August 2022, Bang & Olufsen had kr.386.0m of debt, up from kr.130.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds kr.532.0m in cash, so it actually has kr.146.0m net cash.

A Look At Bang & Olufsen's Liabilities

According to the last reported balance sheet, Bang & Olufsen had liabilities of kr.1.25b due within 12 months, and liabilities of kr.219.0m due beyond 12 months. Offsetting this, it had kr.532.0m in cash and kr.515.0m in receivables that were due within 12 months. So its liabilities total kr.417.0m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Bang & Olufsen is worth kr.1.16b, and thus could probably raise enough capital to shore up 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, Bang & Olufsen also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Bang & Olufsen'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.

Over 12 months, Bang & Olufsen reported revenue of kr.2.9b, which is a gain of 2.2%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Bang & Olufsen?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Bang & Olufsen lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through kr.280m of cash and made a loss of kr.131m. With only kr.146.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Bang & Olufsen you should know about.

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.