Is Blue Bird (NASDAQ:BLBD) Weighed On By Its Debt Load?

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. We can see that Blue Bird Corporation (NASDAQ:BLBD) does use debt in its business. But the real question is whether this debt is making the company risky.

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

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What Is Blue Bird's Debt?

The image below, which you can click on for greater detail, shows that at July 2022 Blue Bird had debt of US$213.6m, up from US$169.1m in one year. 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?

We can see from the most recent balance sheet that Blue Bird had liabilities of US$186.7m falling due within a year, and liabilities of US$254.5m due beyond 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 it has liabilities totalling US$401.7m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$412.8m, so it does suggest shareholders should keep an eye on Blue Bird's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Blue Bird's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Blue Bird had a loss before interest and tax, and actually shrunk its revenue by 4.9%, to US$735m. 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$14m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$101m of cash over the last year. So in short it's a really risky stock. 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. To that end, you should learn about the 2 warning signs we've spotted with Blue Bird (including 1 which can't be ignored) .

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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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.