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, Beasley Broadcast Group, Inc. (NASDAQ:BBGI) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company’s use of debt, we first look at cash and debt together.
What Is Beasley Broadcast Group’s Net Debt?
As you can see below, at the end of March 2019, Beasley Broadcast Group had US$241.3m of debt, up from US$212.2m a year ago. Click the image for more detail. On the flip side, it has US$16.4m in cash leading to net debt of about US$224.9m.
How Strong Is Beasley Broadcast Group’s Balance Sheet?
The latest balance sheet data shows that Beasley Broadcast Group had liabilities of US$33.1m due within a year, and liabilities of US$410.4m falling due after that. On the other hand, it had cash of US$16.4m and US$41.4m worth of receivables due within a year. So its liabilities total US$385.7m more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the US$85.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we’d watch its balance sheet closely, without a doubt At the end of the day, Beasley Broadcast Group would probably need a major re-capitalization if its creditors were to demand repayment. Either way, since Beasley Broadcast Group does have more debt than cash, it’s worth keeping an eye on its balance sheet.
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). 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 2.21 times and a disturbingly high net debt to EBITDA ratio of 5.07 hit our confidence in Beasley Broadcast Group like a one-two punch to the gut. This means we’d consider it to have a heavy debt load. Fortunately, Beasley Broadcast Group grew its EBIT by 8.8% in the last year, slowly shrinking its debt relative to earnings. 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 Beasley Broadcast Group 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.
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, Beasley Broadcast Group produced sturdy free cash flow equating to 59% 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.
To be frank both Beasley Broadcast Group’s net debt to EBITDA and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least it’s pretty decent at converting EBIT to free cash flow; that’s encouraging. We’re quite clear that we consider Beasley Broadcast Group to be really rather risky, as a result of its debt. So we’re almost as wary of this stock as a hungry kitten is about falling into its owner’s fish pond: once bitten, twice shy, as they say. In light of our reservations about the company’s balance sheet, it seems sensible to check if insiders have been selling shares recently.
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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