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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.' 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 can see that Beyond International Limited (ASX:BYI) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Beyond International's Debt?
As you can see below, at the end of December 2020, Beyond International had AU$4.69m of debt, up from AU$871.0k a year ago. Click the image for more detail. But on the other hand it also has AU$17.9m in cash, leading to a AU$13.2m net cash position.
How Healthy Is Beyond International's Balance Sheet?
We can see from the most recent balance sheet that Beyond International had liabilities of AU$61.8m falling due within a year, and liabilities of AU$2.91m due beyond that. On the other hand, it had cash of AU$17.9m and AU$31.0m worth of receivables due within a year. So it has liabilities totalling AU$15.8m more than its cash and near-term receivables, combined.
Beyond International has a market capitalization of AU$40.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 it is Beyond International'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.
In the last year Beyond International wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to AU$98m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Beyond International?
While Beyond International lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow AU$16m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. One positive is that Beyond International is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Beyond International has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.
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.
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. 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.
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