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.’ So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Beyond International Limited (ASX:BYI) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
What Is Beyond International’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 Beyond International had AU$4.51m of debt, an increase on AU$67.0k, over one year. However, its balance sheet shows it holds AU$8.18m in cash, so it actually has AU$3.67m net cash.
A Look At Beyond International’s Liabilities
Zooming in on the latest balance sheet data, we can see that Beyond International had liabilities of AU$50.5m due within 12 months and liabilities of AU$3.51m due beyond that. On the other hand, it had cash of AU$8.18m and AU$29.8m worth of receivables due within a year. So its liabilities total AU$16.1m more than the combination of its cash and short-term receivables.
This deficit isn’t so bad because Beyond International is worth AU$31.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Beyond International also has more cash than debt, so we’re pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can’t view debt in total isolation; since Beyond International will need earnings to service that debt. So when considering debt, it’s definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Beyond International wasn’t profitable at an EBIT level, but managed to grow its revenue by 3.8%, to AU$86m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Beyond International?
Go to the news source: Is Beyond International (ASX:BYI) Weighed On By Its Debt Load?