Yahoo Finance Is Breville Group (ASX:BRG) Using Too Much Debt?
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Breville Group Limited (ASX:BRG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Breville Group
What Is Breville Group's Net Debt?
As you can see below, at the end of December 2021, Breville Group had AU$146.4m of debt, up from AU$14.8m a year ago. Click the image for more detail. However, it does have AU$178.1m in cash offsetting this, leading to net cash of AU$31.7m.
A Look At Breville Group's Liabilities
The latest balance sheet data shows that Breville Group had liabilities of AU$398.2m due within a year, and liabilities of AU$188.4m falling due after that. Offsetting this, it had AU$178.1m in cash and AU$375.4m in receivables that were due within 12 months. So it has liabilities totalling AU$33.0m more than its cash and near-term receivables, combined.
This state of affairs indicates that Breville Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the AU$3.25b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Breville Group also has more cash than debt, so we're pretty confident it can manage its debt safely.
Another good sign is that Breville Group has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Breville 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Breville Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Breville Group recorded free cash flow of 37% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
Summing up
While it is always sensible to look at a company's total liabilities, it is very reassuring that Breville Group has AU$31.7m in net cash. And it impressed us with its EBIT growth of 27% over the last year. So is Breville Group's debt a risk? It doesn't seem so to us. 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. To that end, you should learn about the 2 warning signs we've spotted with Breville Group (including 1 which is concerning) .
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
