We Think St Barbara (ASX:SBM) Can Stay On Top Of Its Debt
Warren Buffett famously said, '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 St Barbara Limited (ASX:SBM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for St Barbara
What Is St Barbara's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 St Barbara had AU$304.2m of debt, an increase on none, over one year. But it also has AU$411.5m in cash to offset that, meaning it has AU$107.4m net cash.
How Strong Is St Barbara's Balance Sheet?
The latest balance sheet data shows that St Barbara had liabilities of AU$116.1m due within a year, and liabilities of AU$709.9m falling due after that. On the other hand, it had cash of AU$411.5m and AU$8.70m worth of receivables due within a year. So its liabilities total AU$405.8m more than the combination of its cash and short-term receivables.
Since publicly traded St Barbara shares are worth a total of AU$2.16b, it seems unlikely that this level of liabilities would be a major threat. 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, St Barbara also has more cash than debt, so we're pretty confident it can manage its debt safely.
On the other hand, St Barbara saw its EBIT drop by 5.5% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine St Barbara'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While St Barbara 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, St Barbara produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing up
Although St Barbara's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of AU$107.4m. The cherry on top was that in converted 76% of that EBIT to free cash flow, bringing in AU$145m. So we are not troubled with St Barbara's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - St Barbara has 1 warning sign we think you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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