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 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. We note that Boiron SA (EPA:BOI) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. 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.
How Much Debt Does Boiron Carry?
The image below, which you can click on for greater detail, shows that Boiron had debt of €8.20m at the end of June 2019, a reduction from €10.1m over a year. However, it does have €180.2m in cash offsetting this, leading to net cash of €172.0m.
How Healthy Is Boiron's Balance Sheet?
According to the last reported balance sheet, Boiron had liabilities of €141.2m due within 12 months, and liabilities of €129.9m due beyond 12 months. Offsetting these obligations, it had cash of €180.2m as well as receivables valued at €106.6m due within 12 months. So it actually has €15.7m more liquid assets than total liabilities.
This short term liquidity is a sign that Boiron could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Boiron has more cash than debt is arguably a good indication that it can manage its debt safely.
In fact Boiron's saving grace is its low debt levels, because its EBIT has tanked 26% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Boiron can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Boiron 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. In the last three years, Boiron's free cash flow amounted to 37% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.
While we empathize with investors who find debt concerning, you should keep in mind that Boiron has net cash of €172.0m, as well as more liquid assets than liabilities. So we don't have any problem with Boiron's use of debt. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Boiron's dividend history, without delay!
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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