Is Dutch Bros (NYSE:BROS) 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.' 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. We can see that Dutch Bros Inc. (NYSE:BROS) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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.

See our latest analysis for Dutch Bros

What Is Dutch Bros's Net Debt?

The image below, which you can click on for greater detail, shows that Dutch Bros had debt of US$240.1m at the end of June 2024, a reduction from US$277.5m over a year. But it also has US$262.4m in cash to offset that, meaning it has US$22.3m net cash.

How Strong Is Dutch Bros' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dutch Bros had liabilities of US$153.1m due within 12 months and liabilities of US$1.49b due beyond that. On the other hand, it had cash of US$262.4m and US$12.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.37b.

While this might seem like a lot, it is not so bad since Dutch Bros has a market capitalization of US$3.87b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Dutch Bros boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Dutch Bros's EBIT launched higher than Elon Musk, gaining a whopping 196% on last year. 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 Dutch Bros'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Dutch Bros may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last two years, Dutch Bros burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

Although Dutch Bros's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$22.3m. And we liked the look of last year's 196% year-on-year EBIT growth. So we don't have any problem with Dutch Bros's use of debt. 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. We've identified 1 warning sign with Dutch Bros , and understanding them should be part of your investment process.

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.