Koninklijke Brill (AMS:BRILL) Has A Rock Solid Balance Sheet

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. As with many other companies Koninklijke Brill NV (AMS:BRILL) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Koninklijke Brill

How Much Debt Does Koninklijke Brill Carry?

As you can see below, Koninklijke Brill had €4.58m of debt at December 2020, down from €4.85m a year prior. But on the other hand it also has €5.90m in cash, leading to a €1.32m net cash position.

A Look At Koninklijke Brill's Liabilities

Zooming in on the latest balance sheet data, we can see that Koninklijke Brill had liabilities of €20.9m due within 12 months and liabilities of €8.83m due beyond that. Offsetting these obligations, it had cash of €5.90m as well as receivables valued at €10.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €13.7m.

Koninklijke Brill has a market capitalization of €45.4m, so it could very likely raise cash to ameliorate 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, Koninklijke Brill 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 Koninklijke Brill has boosted its EBIT by 37%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Koninklijke Brill will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Koninklijke Brill 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. Over the last three years, Koninklijke Brill recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

Although Koninklijke Brill's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €1.32m. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in €5.0m. So we don't think Koninklijke Brill'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 Koninklijke Brill has 3 warning signs (and 1 which is potentially serious) we think you should know about.

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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