Does Beter Bed Holding (AMS:BBED) Have A Healthy 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Beter Bed Holding N.V. (AMS:BBED) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Beter Bed Holding

What Is Beter Bed Holding's Debt?

The image below, which you can click on for greater detail, shows that Beter Bed Holding had debt of €7.82m at the end of June 2020, a reduction from €34.1m over a year. However, it does have €9.55m in cash offsetting this, leading to net cash of €1.73m.

How Strong Is Beter Bed Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beter Bed Holding had liabilities of €68.3m due within 12 months and liabilities of €25.3m due beyond that. On the other hand, it had cash of €9.55m and €11.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €72.3m.

Beter Bed Holding has a market capitalization of €121.9m, 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. Despite its noteworthy liabilities, Beter Bed Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Beter Bed Holding grew its EBIT by 6.2% in the last year. Whilst that hardly knocks our socks off it is a positive when it comes to debt. 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 Beter Bed Holding'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Beter Bed Holding 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, Beter Bed Holding recorded free cash flow worth a fulsome 99% 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 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 €1.73m. The cherry on top was that in converted 99% of that EBIT to free cash flow, bringing in €42m. 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. To that end, you should learn about the 3 warning signs we've spotted with Beter Bed Holding (including 1 which is doesn't sit too well with us) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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