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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Bassett Furniture Industries, Incorporated (NASDAQ:BSET) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Bassett Furniture Industries's Debt?
The image below, which you can click on for greater detail, shows that Bassett Furniture Industries had debt of US$72.0k at the end of June 2019, a reduction from US$541.0k over a year. But it also has US$34.2m in cash to offset that, meaning it has US$34.2m net cash.
How Strong Is Bassett Furniture Industries's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Bassett Furniture Industries had liabilities of US$67.5m due within 12 months and liabilities of US$25.9m due beyond that. Offsetting this, it had US$34.2m in cash and US$21.4m in receivables that were due within 12 months. So its liabilities total US$37.7m more than the combination of its cash and short-term receivables.
Bassett Furniture Industries has a market capitalization of US$135.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Bassett Furniture Industries boasts net cash, so it's fair to say it does not have a heavy debt load!
The modesty of its debt load may become crucial for Bassett Furniture Industries if management cannot prevent a repeat of the 58% cut to EBIT 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 it is future earnings, more than anything, that will determine Bassett Furniture Industries'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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Bassett Furniture Industries 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. Over the most recent three years, Bassett Furniture Industries recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Although Bassett Furniture Industries's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$34m. So we are not troubled with Bassett Furniture Industries's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Bassett Furniture Industries insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.