Is Blue Bird (NASDAQ:BLBD) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Blue Bird Corporation (NASDAQ:BLBD) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Blue Bird

What Is Blue Bird's Debt?

As you can see below, at the end of July 2022, Blue Bird had US$213.6m of debt, up from US$169.1m a year ago. Click the image for more detail. On the flip side, it has US$26.5m in cash leading to net debt of about US$187.1m.

How Healthy Is Blue Bird's Balance Sheet?

The latest balance sheet data shows that Blue Bird had liabilities of US$186.7m due within a year, and liabilities of US$254.5m falling due after that. Offsetting these obligations, it had cash of US$26.5m as well as receivables valued at US$13.0m due within 12 months. So its liabilities total US$401.7m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's US$361.2m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Blue Bird can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Blue Bird made a loss at the EBIT level, and saw its revenue drop to US$735m, which is a fall of 4.9%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Blue Bird produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$16m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of US$101m over the last twelve months. So suffice it to say we consider the stock to be risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Blue Bird (of which 1 is significant!) you should know about.

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. 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.