Is BT Brands (NASDAQ:BTBD) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that BT Brands, Inc. (NASDAQ:BTBD) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for BT Brands

How Much Debt Does BT Brands Carry?

The image below, which you can click on for greater detail, shows that BT Brands had debt of US$2.34m at the end of September 2024, a reduction from US$2.50m over a year. However, it does have US$5.06m in cash offsetting this, leading to net cash of US$2.72m.

How Healthy Is BT Brands' Balance Sheet?

According to the last reported balance sheet, BT Brands had liabilities of US$1.46m due within 12 months, and liabilities of US$3.72m due beyond 12 months. Offsetting these obligations, it had cash of US$5.06m as well as receivables valued at US$49.4k due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to BT Brands' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$9.60m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, BT Brands boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is BT Brands's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year BT Brands wasn't profitable at an EBIT level, but managed to grow its revenue by 4.2%, to US$15m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is BT Brands?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that BT Brands had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$727k and booked a US$1.2m accounting loss. But the saving grace is the US$2.72m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with BT Brands (including 2 which shouldn't be ignored) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.