Barratt Redrow (LON:BTRW) Has A Somewhat Strained Balance Sheet

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Barratt Redrow plc (LON:BTRW) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Barratt Redrow's Net Debt?

The chart below, which you can click on for greater detail, shows that Barratt Redrow had UK£200.0m in debt in December 2024; about the same as the year before. However, it does have UK£655.3m in cash offsetting this, leading to net cash of UK£455.3m.

How Healthy Is Barratt Redrow's Balance Sheet?

According to the last reported balance sheet, Barratt Redrow had liabilities of UK£2.04b due within 12 months, and liabilities of UK£1.15b due beyond 12 months. Offsetting this, it had UK£655.3m in cash and UK£221.4m in receivables that were due within 12 months. So its liabilities total UK£2.32b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Barratt Redrow is worth UK£6.76b, 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. Despite its noteworthy liabilities, Barratt Redrow boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Barratt Redrow

In fact Barratt Redrow's saving grace is its low debt levels, because its EBIT has tanked 21% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Barratt Redrow's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Barratt Redrow 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. Looking at the most recent three years, Barratt Redrow recorded free cash flow of 23% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Barratt Redrow's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of UK£455.3m. So although we see some areas for improvement, we're not too worried about Barratt Redrow's balance sheet. 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. For example, we've discovered 4 warning signs for Barratt Redrow (2 don't sit too well with us!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.