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Would Ballantyne Strong (NYSEMKT:BTN) Be Better Off With Less Debt?

Simply Wall St

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 can see that Ballantyne Strong, Inc (NYSEMKT:BTN) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Ballantyne Strong

How Much Debt Does Ballantyne Strong Carry?

As you can see below, Ballantyne Strong had US$7.73m of debt at June 2019, down from US$11.1m a year prior. However, it does have US$2.87m in cash offsetting this, leading to net debt of about US$4.86m.

AMEX:BTN Historical Debt, October 27th 2019

A Look At Ballantyne Strong's Liabilities

According to the last reported balance sheet, Ballantyne Strong had liabilities of US$18.2m due within 12 months, and liabilities of US$15.6m due beyond 12 months. Offsetting these obligations, it had cash of US$2.87m as well as receivables valued at US$14.1m due within 12 months. So it has liabilities totalling US$16.9m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Ballantyne Strong has a market capitalization of US$41.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ballantyne Strong 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 Ballantyne Strong had negative earnings before interest and tax, and actually shrunk its revenue by 3.2%, to US$63m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Ballantyne Strong produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$5.7m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$7.5m in negative free cash flow over the last twelve months. So in short it's a really risky stock. For riskier companies like Ballantyne Strong I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.