Does Burberry Group (LON:BRBY) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Burberry Group plc (LON:BRBY) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Burberry Group

How Much Debt Does Burberry Group Carry?

As you can see below, Burberry Group had UK£342.5m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has UK£1.26b in cash, leading to a UK£918.8m net cash position.

A Look At Burberry Group's Liabilities

According to the last reported balance sheet, Burberry Group had liabilities of UK£702.8m due within 12 months, and liabilities of UK£1.24b due beyond 12 months. On the other hand, it had cash of UK£1.26b and UK£277.0m worth of receivables due within a year. So its liabilities total UK£404.2m more than the combination of its cash and short-term receivables.

Given Burberry Group has a humongous market capitalization of UK£9.08b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Burberry Group boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Burberry Group saw its EBIT decline by 5.4% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 Burberry Group 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Burberry Group 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, Burberry Group generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

We could understand if investors are concerned about Burberry Group's liabilities, but we can be reassured by the fact it has has net cash of UK£918.8m. And it impressed us with free cash flow of UK£477m, being 84% of its EBIT. So we don't think Burberry Group's use of debt is risky. 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. For instance, we've identified 2 warning signs for Burberry Group that you should be aware of.

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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