Stock Analysis
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Does Broadridge Financial Solutions (NYSE:BR) Have A Healthy Balance Sheet?
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.' 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. Importantly, Broadridge Financial Solutions, Inc. (NYSE:BR) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Broadridge Financial Solutions
What Is Broadridge Financial Solutions's Debt?
The chart below, which you can click on for greater detail, shows that Broadridge Financial Solutions had US$4.08b in debt in March 2023; about the same as the year before. On the flip side, it has US$332.3m in cash leading to net debt of about US$3.74b.
How Strong Is Broadridge Financial Solutions' Balance Sheet?
According to the last reported balance sheet, Broadridge Financial Solutions had liabilities of US$1.16b due within 12 months, and liabilities of US$5.27b due beyond 12 months. Offsetting this, it had US$332.3m in cash and US$1.10b in receivables that were due within 12 months. So its liabilities total US$5.00b more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Broadridge Financial Solutions is worth a massive US$18.2b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Broadridge Financial Solutions has a debt to EBITDA ratio of 3.0 and its EBIT covered its interest expense 6.9 times. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. If Broadridge Financial Solutions can keep growing EBIT at last year's rate of 18% over the last year, then it will find its debt load easier to manage. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Broadridge Financial Solutions's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Broadridge Financial Solutions produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
Our View
The good news is that Broadridge Financial Solutions's demonstrated ability to grow its EBIT delights us like a fluffy puppy does a toddler. But, on a more sombre note, we are a little concerned by its net debt to EBITDA. All these things considered, it appears that Broadridge Financial Solutions can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. 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 example, we've discovered 2 warning signs for Broadridge Financial Solutions (1 shouldn't be ignored!) that you should be aware of before investing here.
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.
What are the risks and opportunities for Broadridge Financial Solutions?
Broadridge Financial Solutions, Inc. provides investor communications and technology-driven solutions for the financial services industry.
Rewards
Trading at 14.6% below our estimate of its fair value
Earnings are forecast to grow 10.92% per year
Earnings grew by 17% over the past year
Risks
Significant insider selling over the past 3 months
Has a high level of debt
Further research on
Broadridge Financial Solutions
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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.
About NYSE:BR
Broadridge Financial Solutions
Broadridge Financial Solutions, Inc. provides investor communications and technology-driven solutions for the financial services industry.
Solid track record established dividend payer.
