Does Brookdale Senior Living (NYSE:BKD) Have A Healthy Balance Sheet?

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 can see that Brookdale Senior Living Inc. (NYSE:BKD) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Brookdale Senior Living

How Much Debt Does Brookdale Senior Living Carry?

The chart below, which you can click on for greater detail, shows that Brookdale Senior Living had US$3.82b in debt in September 2022; about the same as the year before. On the flip side, it has US$388.7m in cash leading to net debt of about US$3.43b.

A Look At Brookdale Senior Living's Liabilities

According to the last reported balance sheet, Brookdale Senior Living had liabilities of US$657.0m due within 12 months, and liabilities of US$4.94b due beyond 12 months. Offsetting this, it had US$388.7m in cash and US$51.5m in receivables that were due within 12 months. So it has liabilities totalling US$5.16b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$474.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Brookdale Senior Living would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Brookdale Senior Living 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.

In the last year Brookdale Senior Living had a loss before interest and tax, and actually shrunk its revenue by 3.7%, to US$2.5b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Brookdale Senior Living produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$153m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the fact is that it incinerated US$237m of cash in the last twelve months, and has precious few liquid assets in comparison to its liabilities. So is this a high risk stock? We think so, and we'd avoid it. 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. To that end, you should be aware of the 2 warning signs we've spotted with Brookdale Senior Living .

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.