Is Broadway Industrial Group (SGX:B69) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Broadway Industrial Group Limited (SGX:B69) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. 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 Broadway Industrial Group

How Much Debt Does Broadway Industrial Group Carry?

The image below, which you can click on for greater detail, shows that Broadway Industrial Group had debt of S$6.81m at the end of December 2022, a reduction from S$11.3m over a year. But on the other hand it also has S$29.4m in cash, leading to a S$22.6m net cash position.

How Strong Is Broadway Industrial Group's Balance Sheet?

According to the last reported balance sheet, Broadway Industrial Group had liabilities of S$59.4m due within 12 months, and liabilities of S$6.10m due beyond 12 months. On the other hand, it had cash of S$29.4m and S$25.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$10.5m.

This deficit isn't so bad because Broadway Industrial Group is worth S$37.3m, and thus could probably raise enough capital to shore up 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, Broadway Industrial Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Shareholders should be aware that Broadway Industrial Group's EBIT was down 49% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Broadway Industrial Group's earnings that will influence how the balance sheet holds up in the future. 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 Broadway Industrial Group 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. Happily for any shareholders, Broadway Industrial Group actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Broadway Industrial Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of S$22.6m. And it impressed us with free cash flow of S$15m, being 172% of its EBIT. So we don't have any problem with Broadway Industrial Group'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. For instance, we've identified 2 warning signs for Broadway Industrial Group that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.