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. As with many other companies Boston Omaha Corporation (NASDAQ:BOMN) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 Boston Omaha's Debt?
The image below, which you can click on for greater detail, shows that at September 2019 Boston Omaha had debt of US$18.1m, up from none in one year. But on the other hand it also has US$144.0m in cash, leading to a US$125.9m net cash position.
A Look At Boston Omaha's Liabilities
The latest balance sheet data shows that Boston Omaha had liabilities of US$20.7m due within a year, and liabilities of US$65.4m falling due after that. Offsetting these obligations, it had cash of US$144.0m as well as receivables valued at US$5.86m due within 12 months. So it actually has US$63.8m more liquid assets than total liabilities.
This short term liquidity is a sign that Boston Omaha could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Boston Omaha boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Boston Omaha 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.
Over 12 months, Boston Omaha reported revenue of US$39m, which is a gain of 178%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!
So How Risky Is Boston Omaha?
While Boston Omaha lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$4.2m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Keeping in mind its 178% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Boston Omaha insider transactions.
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.
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