Brookdale Senior Living (NYSE:BKD) Has No Shortage Of Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Brookdale Senior Living Inc. (NYSE:BKD) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Brookdale Senior Living

What Is Brookdale Senior Living's Debt?

The chart below, which you can click on for greater detail, shows that Brookdale Senior Living had US$3.70b in debt in December 2023; about the same as the year before. On the flip side, it has US$307.7m in cash leading to net debt of about US$3.39b.

A Look At Brookdale Senior Living's Liabilities

We can see from the most recent balance sheet that Brookdale Senior Living had liabilities of US$600.1m falling due within a year, and liabilities of US$4.57b due beyond that. On the other hand, it had cash of US$307.7m and US$48.4m worth of receivables due within a year. So it has liabilities totalling US$4.81b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$1.26b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Brookdale Senior Living would likely require a major re-capitalisation if it had to pay its creditors today.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Weak interest cover of 0.12 times and a disturbingly high net debt to EBITDA ratio of 9.2 hit our confidence in Brookdale Senior Living like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. One redeeming factor for Brookdale Senior Living is that it turned last year's EBIT loss into a gain of US$27m, over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Brookdale Senior Living can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. During the last year, Brookdale Senior Living burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

On the face of it, Brookdale Senior Living's conversion of EBIT to free cash flow left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least its EBIT growth rate is not so bad. It's also worth noting that Brookdale Senior Living is in the Healthcare industry, which is often considered to be quite defensive. After considering the datapoints discussed, we think Brookdale Senior Living has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. 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. For instance, we've identified 1 warning sign for Brookdale Senior Living that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.