Bluegreen Vacations Holding (NYSE:BVH) Has A Somewhat Strained Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Bluegreen Vacations Holding Corporation (NYSE:BVH) does carry debt. But should shareholders be worried about its use of debt?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Bluegreen Vacations Holding

What Is Bluegreen Vacations Holding's Debt?

As you can see below, Bluegreen Vacations Holding had US$721.7m of debt at March 2021, down from US$822.9m a year prior. On the flip side, it has US$199.2m in cash leading to net debt of about US$522.6m.

A Look At Bluegreen Vacations Holding's Liabilities

We can see from the most recent balance sheet that Bluegreen Vacations Holding had liabilities of US$119.9m falling due within a year, and liabilities of US$849.5m due beyond that. Offsetting this, it had US$199.2m in cash and US$405.4m in receivables that were due within 12 months. So it has liabilities totalling US$364.9m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$449.1m, so it does suggest shareholders should keep an eye on Bluegreen Vacations Holding's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Bluegreen Vacations Holding shareholders face the double whammy of a high net debt to EBITDA ratio (14.1), and fairly weak interest coverage, since EBIT is just 0.38 times the interest expense. The debt burden here is substantial. Worse, Bluegreen Vacations Holding's EBIT was down 71% over the last year. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. 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 Bluegreen Vacations Holding'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Bluegreen Vacations Holding produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

On the face of it, Bluegreen Vacations Holding's interest cover left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. We're quite clear that we consider Bluegreen Vacations Holding to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Bluegreen Vacations Holding has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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