These 4 Measures Indicate That Burberry Group (LON:BRBY) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Burberry Group plc (LON:BRBY) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 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?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Burberry Group had UK£392.0m of debt, an increase on UK£374.0m, over one year. But on the other hand it also has UK£663.0m in cash, leading to a UK£271.0m net cash position.

How Strong Is Burberry Group's Balance Sheet?

According to the last reported balance sheet, Burberry Group had liabilities of UK£1.06b due within 12 months, and liabilities of UK£1.33b due beyond 12 months. Offsetting these obligations, it had cash of UK£663.0m as well as receivables valued at UK£381.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£1.35b.

Burberry Group has a market capitalization of UK£5.07b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Burberry Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Burberry Group has increased its EBIT by 9.6% over twelve months, which should ease any concerns about debt repayment. 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 company can only pay off debt with cold hard cash, not accounting profits. Burberry Group 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, Burberry Group recorded free cash flow worth a fulsome 95% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While Burberry Group does have more liabilities than liquid assets, it also has net cash of UK£271.0m. And it impressed us with free cash flow of UK£494m, being 95% of its EBIT. So we don't think Burberry Group's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Burberry Group has 1 warning sign we think you should be aware of.

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.