Is Breville Group Limited (ASX:BRG) A Financially Sound Company?
Investors are always looking for growth in small-cap stocks like Breville Group Limited (ASX:BRG), with a market cap of AU$1.67b. However, an important fact which most ignore is: how financially healthy is the business? Consumer Durables businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I recommend you dig deeper yourself into BRG here.
How much cash does BRG generate through its operations?
Over the past year, BRG has ramped up its debt from AU$35.8m to AU$45.3m , which comprises of short- and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at AU$103.3m , ready to deploy into the business. Additionally, BRG has produced AU$88.7m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 196%, meaning that BRG’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In BRG’s case, it is able to generate 1.96x cash from its debt capital.
Can BRG meet its short-term obligations with the cash in hand?
At the current liabilities level of AU$108.8m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.9x. Generally, for Consumer Durables companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can BRG service its debt comfortably?
With debt at 16.0% of equity, BRG may be thought of as appropriately levered. This range is considered safe as BRG is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if BRG’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For BRG, the ratio of 79.58x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as BRG’s high interest coverage is seen as responsible and safe practice.
Next Steps:
BRG’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how BRG has been performing in the past. I recommend you continue to research Breville Group to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for BRG’s future growth? Take a look at our free research report of analyst consensus for BRG’s outlook.
Valuation: What is BRG worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether BRG is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
