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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Bigblu Broadband plc (LON:BBB) does carry debt. But the more important question is: how much risk is that debt creating?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Bigblu Broadband's Net Debt?
The image below, which you can click on for greater detail, shows that Bigblu Broadband had debt of UK£7.95m at the end of May 2021, a reduction from UK£26.1m over a year. However, it does have UK£12.1m in cash offsetting this, leading to net cash of UK£4.14m.
How Strong Is Bigblu Broadband's Balance Sheet?
According to the last reported balance sheet, Bigblu Broadband had liabilities of UK£16.0m due within 12 months, and liabilities of UK£9.12m due beyond 12 months. Offsetting this, it had UK£12.1m in cash and UK£2.55m in receivables that were due within 12 months. So it has liabilities totalling UK£10.5m more than its cash and near-term receivables, combined.
Given Bigblu Broadband has a market capitalization of UK£65.9m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Bigblu Broadband also has more cash than debt, so we're pretty confident it can manage its debt safely.
We also note that Bigblu Broadband improved its EBIT from a last year's loss to a positive UK£2.1m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Bigblu Broadband's ability to maintain a healthy balance sheet going forward. 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. While Bigblu Broadband has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, Bigblu Broadband burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Although Bigblu Broadband's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of UK£4.14m. So although we see some areas for improvement, we're not too worried about Bigblu Broadband's balance sheet. 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 instance, we've identified 2 warning signs for Bigblu Broadband that you should be aware of.
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.
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.
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