Stock Analysis

Is Birks Group (NYSEMKT:BGI) Weighed On By Its Debt Load?

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NYSEAM:BGI
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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. As with many other companies Birks Group Inc. (NYSEMKT:BGI) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Birks Group

How Much Debt Does Birks Group Carry?

As you can see below, at the end of September 2020, Birks Group had CA$86.1m of debt, up from CA$75.0m a year ago. Click the image for more detail. On the flip side, it has CA$2.41m in cash leading to net debt of about CA$83.7m.

debt-equity-history-analysis
AMEX:BGI Debt to Equity History November 28th 2020

A Look At Birks Group's Liabilities

We can see from the most recent balance sheet that Birks Group had liabilities of CA$111.6m falling due within a year, and liabilities of CA$93.8m due beyond that. On the other hand, it had cash of CA$2.41m and CA$6.27m worth of receivables due within a year. So it has liabilities totalling CA$196.7m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CA$22.9m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Birks Group would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Birks Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Birks Group made a loss at the EBIT level, and saw its revenue drop to CA$141m, which is a fall of 16%. That's not what we would hope to see.

Caveat Emptor

Not only did Birks Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CA$6.2m at the EBIT level. 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. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it burned through CA$10m in the last year. So is this a high risk stock? We think so, and we'd avoid it. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Birks Group is showing 4 warning signs in our investment analysis , and 2 of those are significant...

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.

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What are the risks and opportunities for Birks Group?

Birks Group Inc. designs, develops, manufactures, and retails fine jewelry, timepieces, sterling and plated silverware, and gifts in the United States and Canada.

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Rewards

  • Earnings have grown 41.3% per year over the past 5 years

Risks

  • Has less than 1 year of cash runway

  • Shareholders have been diluted in the past year

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