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. 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 can see that Beter Bed Holding N.V. (AMS:BBED) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.
View 3 warning signs we detected for Beter Bed Holding
What Is Beter Bed Holding's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Beter Bed Holding had debt of €34.1m, up from €21.8 in one year. However, because it has a cash reserve of €3.78m, its net debt is less, at about €30.3m.
A Look At Beter Bed Holding's Liabilities
According to the last reported balance sheet, Beter Bed Holding had liabilities of €188.3m due within 12 months, and liabilities of €30.9m due beyond 12 months. Offsetting these obligations, it had cash of €3.78m as well as receivables valued at €7.38m due within 12 months. So its liabilities total €208.0m more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the €56.4m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Beter Bed Holding would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Beter Bed Holding can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Beter Bed Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 42%, to €404m. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
Despite the top line growth, Beter Bed Holding still had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost a very considerable €26m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through €17m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. For riskier companies like Beter Bed Holding I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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