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Does Barratt Developments (LON:BDEV) Have A Healthy Balance Sheet?

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·4 min read
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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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Barratt Developments plc (LON:BDEV) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Barratt Developments

What Is Barratt Developments's Debt?

As you can see below, Barratt Developments had UK£201.1m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds UK£1.30b in cash, so it actually has UK£1.10b net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Barratt Developments' Balance Sheet?

According to the last reported balance sheet, Barratt Developments had liabilities of UK£1.34b due within 12 months, and liabilities of UK£508.8m due beyond 12 months. Offsetting these obligations, it had cash of UK£1.30b as well as receivables valued at UK£131.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£419.3m.

Of course, Barratt Developments has a titanic market capitalization of UK£7.83b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Barratt Developments boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Barratt Developments's load is not too heavy, because its EBIT was down 33% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Barratt Developments 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. While Barratt Developments 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 three years, Barratt Developments produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about Barratt Developments's liabilities, but we can be reassured by the fact it has has net cash of UK£1.10b. And it impressed us with free cash flow of UK£657m, being 70% of its EBIT. So we don't have any problem with Barratt Developments's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Barratt Developments 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.