These 4 Measures Indicate That Bluegreen Vacations Holding (NYSE:BVH) Is Using Debt Extensively

Warren Buffett famously said, '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. Importantly, Bluegreen Vacations Holding Corporation (NYSE:BVH) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Bluegreen Vacations Holding

What Is Bluegreen Vacations Holding's Net Debt?

As you can see below, at the end of December 2020, Bluegreen Vacations Holding had US$745.9m of debt, up from US$706.2m a year ago. Click the image for more detail. However, because it has a cash reserve of US$221.1m, its net debt is less, at about US$524.8m.

A Look At Bluegreen Vacations Holding's Liabilities

Zooming in on the latest balance sheet data, we can see that Bluegreen Vacations Holding had liabilities of US$14.6m due within 12 months and liabilities of US$972.8m due beyond that. On the other hand, it had cash of US$221.1m and US$412.2m worth of receivables due within a year. So its liabilities total US$354.0m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of US$325.5m, we think shareholders really should watch Bluegreen Vacations Holding's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Weak interest cover of 0.023 times and a disturbingly high net debt to EBITDA ratio of 20.5 hit our confidence in Bluegreen Vacations Holding like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. Worse, Bluegreen Vacations Holding's EBIT was down 99% 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Bluegreen Vacations Holding can strengthen its balance sheet over time. 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, Bluegreen Vacations Holding produced sturdy free cash flow equating to 57% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

To be frank both Bluegreen Vacations Holding's interest cover and its track record of (not) growing its EBIT make us rather uncomfortable with its debt levels. But on the bright side, its conversion of EBIT to free cash flow is a good sign, and makes us more optimistic. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Bluegreen Vacations Holding (including 1 which doesn't sit too well with us) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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