Is Brady (NYSE:BRC) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Brady Corporation (NYSE:BRC) does carry 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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Brady

How Much Debt Does Brady Carry?

You can click the graphic below for the historical numbers, but it shows that as of April 2024 Brady had US$63.8m of debt, an increase on US$50.8m, over one year. But on the other hand it also has US$160.5m in cash, leading to a US$96.7m net cash position.

How Healthy Is Brady's Balance Sheet?

The latest balance sheet data shows that Brady had liabilities of US$253.1m due within a year, and liabilities of US$148.8m falling due after that. Offsetting these obligations, it had cash of US$160.5m as well as receivables valued at US$195.1m due within 12 months. So its liabilities total US$46.4m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Brady's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$3.43b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Brady boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Brady grew its EBIT by 11% last year, making its debt load easier to handle. 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 Brady'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Brady 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. During the last three years, Brady produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Brady's liabilities, but we can be reassured by the fact it has has net cash of US$96.7m. So we don't think Brady's use of debt is risky. Another factor that would give us confidence in Brady would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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.