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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. Importantly, Brigham Minerals, Inc. (NYSE:MNRL) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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.
What Is Brigham Minerals's Debt?
You can click the graphic below for the historical numbers, but it shows that Brigham Minerals had US$5.00m of debt in September 2020, down from US$45.0m, one year before. But it also has US$8.18m in cash to offset that, meaning it has US$3.18m net cash.
A Look At Brigham Minerals's Liabilities
The latest balance sheet data shows that Brigham Minerals had liabilities of US$7.42m due within a year, and liabilities of US$134.0m falling due after that. Offsetting these obligations, it had cash of US$8.18m as well as receivables valued at US$19.7m due within 12 months. So it has liabilities totalling US$113.6m more than its cash and near-term receivables, combined.
Of course, Brigham Minerals has a market capitalization of US$628.7m, so these liabilities are probably manageable. 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, Brigham Minerals also has more cash than debt, so we're pretty confident it can manage its debt safely.
In fact Brigham Minerals's saving grace is its low debt levels, because its EBIT has tanked 23% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Brigham Minerals can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Brigham Minerals 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. During the last three years, Brigham Minerals burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
While Brigham Minerals does have more liabilities than liquid assets, it also has net cash of US$3.18m. So while Brigham Minerals does not have a great balance sheet, it's certainly not too bad. 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. To that end, you should learn about the 2 warning signs we've spotted with Brigham Minerals (including 1 which is is significant) .
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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