Health Check: How Prudently Does British Automotive Holding (WSE:BAH) Use Debt?

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. As with many other companies British Automotive Holding S.A. (WSE:BAH) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 British Automotive Holding

How Much Debt Does British Automotive Holding Carry?

The image below, which you can click on for greater detail, shows that British Automotive Holding had debt of zł51.8m at the end of September 2020, a reduction from zł168.4m over a year. However, it does have zł105.4m in cash offsetting this, leading to net cash of zł53.7m.

How Strong Is British Automotive Holding's Balance Sheet?

According to the last reported balance sheet, British Automotive Holding had liabilities of zł359.2m due within 12 months, and liabilities of zł36.9m due beyond 12 months. Offsetting this, it had zł105.4m in cash and zł35.4m in receivables that were due within 12 months. So it has liabilities totalling zł255.2m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the zł30.7m 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, British Automotive Holding would probably need a major re-capitalization if its creditors were to demand repayment. Given that British Automotive Holding has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since British Automotive Holding will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, British Automotive Holding made a loss at the EBIT level, and saw its revenue drop to zł786m, which is a fall of 25%. To be frank that doesn't bode well.

So How Risky Is British Automotive Holding?

While British Automotive Holding lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow zł201m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for British Automotive Holding you should be aware of, and 2 of them don't sit too well with us.

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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