Health Check: How Prudently Does Brighton Pier Group (LON:PIER) Use Debt?

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.' 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. Importantly, The Brighton Pier Group PLC (LON:PIER) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Brighton Pier Group

How Much Debt Does Brighton Pier Group Carry?

As you can see below, at the end of December 2020, Brighton Pier Group had UK£16.7m of debt, up from UK£13.2m a year ago. Click the image for more detail. However, it does have UK£4.25m in cash offsetting this, leading to net debt of about UK£12.5m.

A Look At Brighton Pier Group's Liabilities

The latest balance sheet data shows that Brighton Pier Group had liabilities of UK£8.04m due within a year, and liabilities of UK£32.9m falling due after that. Offsetting this, it had UK£4.25m in cash and UK£1.59m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£35.1m.

This deficit casts a shadow over the UK£21.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Brighton Pier Group would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Brighton Pier Group'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, Brighton Pier Group made a loss at the EBIT level, and saw its revenue drop to UK£13m, which is a fall of 59%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Brighton Pier Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping UK£3.7m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through UK£1.2m in negative free cash flow over the last year. So suffice it to say we consider the stock to be 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 Brighton Pier Group that 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. 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.
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