Beter Bed Holding (AMS:BBED) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Beter Bed Holding N.V. (AMS:BBED) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Beter Bed Holding

How Much Debt Does Beter Bed Holding Carry?

You can click the graphic below for the historical numbers, but it shows that Beter Bed Holding had €2.29m of debt in December 2020, down from €9.99m, one year before. But it also has €21.6m in cash to offset that, meaning it has €19.3m net cash.

A Look At Beter Bed Holding's Liabilities

Zooming in on the latest balance sheet data, we can see that Beter Bed Holding had liabilities of €70.1m due within 12 months and liabilities of €29.8m due beyond that. Offsetting these obligations, it had cash of €21.6m as well as receivables valued at €9.14m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €69.1m.

Beter Bed Holding has a market capitalization of €128.2m, 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, Beter Bed Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Beter Bed Holding turned things around in the last 12 months, delivering and EBIT of €13m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Beter Bed Holding 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. Beter Bed Holding 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. Happily for any shareholders, Beter Bed Holding actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

Although Beter Bed Holding's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €19.3m. The cherry on top was that in converted 313% of that EBIT to free cash flow, bringing in €40m. So we don't have any problem with Beter Bed Holding's use of debt. 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. Case in point: We've spotted 1 warning sign for Beter Bed Holding you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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