Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. We notice that Bang abroad limited (NSE: BANG) has debt on its balance sheet. But should shareholders be concerned about its use of debt?
What risk does debt entail?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first look at cash and debt levels, together.
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What is the net debt of Bang Overseas?
You can click on the graph below for the historical figures, but it shows that Bang Overseas had a debt of 225.2 million yen in September 2021, down from 252.2 million yen a year earlier. However, because it has a cash reserve of 155.2 million yen, its net debt is less, at around 70.0 million yen.
A look at the responsibilities of Bang Overseas
Zooming in on the latest balance sheet data, we can see that Bang Overseas had a liability of 341.7 million yen owed within 12 months and a liability of 30.6 million yen owed beyond that. In return, he had 155.2 million yen in cash and 561.2 million yen in receivables due within 12 months. So it actually has 344.0 m Following liquid assets as total liabilities.
This excess liquidity suggests that Bang Overseas’s balance sheet could take a hit just as Homer’s Simpson head can take a hit. With this in mind, one could postulate that its track record means that the company is able to cope with some adversity.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). Thus, we look at debt versus earnings with and without amortization expenses.
We would say that Bang Overseas’ moderate net debt to EBITDA ratio (being 1.9) indicates leverage cautious. And its high interest coverage of 1k times, makes us even more comfortable. Shareholders should know that Bang Overseas’ EBIT fell 68% last year. If this decline continues, it will be more difficult to pay off the debt than to sell foie gras at a vegan convention. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of Bang Overseas that will influence the balance sheet in the future. So if you want to know more about its profits, it may be worth checking out this long term profit trend chart.
Finally, a business can only pay off its debts with hard cash, not with book profits. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Bang Overseas has spent a lot of money. While this may be the result of spending for growth, it makes debt much riskier.
Our point of view
Bang Overseas’ EBIT growth rate was a real negative on this analysis, as was its conversion from EBIT to free cash flow. But like a ballerina finishing on a perfect pirouette, she has no trouble covering her interest charges with her EBIT. Given this range of data points, we believe Bang Overseas is well positioned to manage its debt levels. That said, the load is heavy enough that we recommend that any shareholder watch it closely. When analyzing debt levels, the balance sheet is the obvious place to start. However, not all investment risks lie on the balance sheet – far from it. For example, Bang Overseas has 3 warning signs (and 2 which are potentially serious) we think you should be aware of.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.