These 4 Measures Indicate That Brigham Minerals (NYSE:MNRL) Is Using Debt Extensively

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Brigham Minerals, Inc. (NYSE:MNRL) does use debt in its business. But should shareholders be worried about its use of debt?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Brigham Minerals

What Is Brigham Minerals's Net Debt?

As you can see below, at the end of December 2020, Brigham Minerals had US$20.0m of debt, up from none a year ago. Click the image for more detail. However, because it has a cash reserve of US$9.14m, its net debt is less, at about US$10.9m.

A Look At Brigham Minerals' Liabilities

We can see from the most recent balance sheet that Brigham Minerals had liabilities of US$7.91m falling due within a year, and liabilities of US$167.4m due beyond that. On the other hand, it had cash of US$9.14m and US$17.6m worth of receivables due within a year. So it has liabilities totalling US$148.5m more than its cash and near-term receivables, combined.

Given Brigham Minerals has a market capitalization of US$981.7m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Carrying virtually no net debt, Brigham Minerals has a very light debt load indeed.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Brigham Minerals's net debt is only 0.19 times its EBITDA. And its EBIT covers its interest expense a whopping 32.0 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. It is just as well that Brigham Minerals's load is not too heavy, because its EBIT was down 75% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Brigham Minerals'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. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Brigham Minerals burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

We feel some trepidation about Brigham Minerals's difficulty EBIT growth rate, but we've got positives to focus on, too. To wit both its interest cover and net debt to EBITDA were encouraging signs. Taking the abovementioned factors together we do think Brigham Minerals's debt poses some risks to the business. While that debt can boost returns, we think the company has enough leverage now. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Brigham Minerals that you should be aware of before investing here.

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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