These 4 metrics indicate that Broadridge Financial Solutions (NYSE:BR) is using debt reasonably well

Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We can see that Broadridge Financial Solutions, Inc. (NYSE: BR) uses debt in its operations. But the more important question is: what risk does this debt create?

When is debt a problem?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

Check out our latest analysis for Broadridge Financial Solutions

How much debt does Broadridge Financial Solutions have?

As you can see below, at the end of March 2022, Broadridge Financial Solutions had $4.17 billion in debt, up from $1.74 billion a year ago. Click on the image for more details. On the other hand, it has $277.8 million in cash, resulting in a net debt of around $3.89 billion.

NYSE:BR Debt to Equity May 9, 2022

How strong is Broadridge Financial Solutions’ balance sheet?

Zooming in on the latest balance sheet data, we can see that Broadridge Financial Solutions had liabilities of US$1.18 billion due within 12 months and liabilities of US$5.35 billion due beyond. As compensation for these obligations, it had cash of US$277.8 million and receivables valued at US$988.0 million due within 12 months. Thus, its liabilities outweigh the sum of its cash and (current) receivables by $5.26 billion.

This shortfall is not that bad as Broadridge Financial Solutions is worth US$16.6 billion and therefore could probably raise enough capital to shore up its balance sheet, should the need arise. But we definitely want to keep our eyes peeled for indications that its debt is too risky.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.

With a net debt to EBITDA ratio of 3.4, Broadridge Financial Solutions has a pretty notable amount of debt. On the positive side, its EBIT was 8.5 times its interest expense, and its net debt to EBITDA ratio was quite high, at 3.4. It is important to note that Broadridge Financial Solutions’ EBIT has remained essentially stable over the last twelve months. Ideally, it can reduce its debt by reviving its earnings growth. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Broadridge Financial Solutions’ ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, Broadridge Financial Solutions has produced strong free cash flow equivalent to 68% of its EBIT, which is what we expected. This free cash flow puts the company in a good position to repay its debt, should it arise.

Our point of view

Broadridge Financial Solutions’ ability to convert EBIT to free cash flow and its interest coverage has given us comfort in its ability to manage its debt. On the other hand, its net debt to EBITDA makes us a little less comfortable about its debt. Given this range of data points, we believe Broadridge Financial Solutions is in a good position to manage its debt levels. That said, the charge is heavy enough that we recommend that any shareholder keep a close eye on it. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. To this end, you should be aware of the 1 warning sign we spotted with Broadridge Financial Solutions.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeright now.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.