Barratt Developments (LON:BDEV) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Barratt Developments plc (LON:BDEV) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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, 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.

View our latest analysis for Barratt Developments

What Is Barratt Developments's Net Debt?

As you can see below, Barratt Developments had UK£208.7m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has UK£1.34b in cash to offset that, meaning it has UK£1.13b net cash.

How Healthy Is Barratt Developments' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Barratt Developments had liabilities of UK£1.44b due within 12 months and liabilities of UK£512.7m due beyond that. On the other hand, it had cash of UK£1.34b and UK£152.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£467.7m.

Of course, Barratt Developments has a market capitalization of UK£5.38b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Barratt Developments boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Barratt Developments has boosted its EBIT by 51%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Barratt Developments 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Barratt Developments 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, Barratt Developments recorded free cash flow worth 56% 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

We could understand if investors are concerned about Barratt Developments's liabilities, but we can be reassured by the fact it has has net cash of UK£1.13b. And it impressed us with its EBIT growth of 51% over the last year. So is Barratt Developments's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Barratt Developments that you should be aware of before investing here.

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. 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.