Bedding World (GTSM:2938) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Bedding World Co., Ltd. (GTSM:2938) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Bedding World

How Much Debt Does Bedding World Carry?

The image below, which you can click on for greater detail, shows that Bedding World had debt of NT$231.0m at the end of June 2020, a reduction from NT$259.0m over a year. But on the other hand it also has NT$238.7m in cash, leading to a NT$7.65m net cash position.

How Strong Is Bedding World's Balance Sheet?

We can see from the most recent balance sheet that Bedding World had liabilities of NT$308.0m falling due within a year, and liabilities of NT$712.8m due beyond that. On the other hand, it had cash of NT$238.7m and NT$58.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$723.7m.

This is a mountain of leverage relative to its market capitalization of NT$810.6m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Bedding World boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Bedding World has increased its EBIT by 4.8% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Bedding World 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Bedding World 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, Bedding World actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Bedding World does have more liabilities than liquid assets, it also has net cash of NT$7.65m. And it impressed us with free cash flow of NT$164m, being 112% of its EBIT. So we are not troubled with Bedding World's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Bedding World has 3 warning signs we think you should be aware of.

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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