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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Baby Bunting Group Limited (ASX:BBN) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Baby Bunting Group
How Much Debt Does Baby Bunting Group Carry?
As you can see below, Baby Bunting Group had AU$3.13m of debt at June 2019, down from AU$10.8m a year prior. However, it does have AU$5.84m in cash offsetting this, leading to net cash of AU$2.71m.
A Look At Baby Bunting Group's Liabilities
We can see from the most recent balance sheet that Baby Bunting Group had liabilities of AU$53.8m falling due within a year, and liabilities of AU$7.06m due beyond that. Offsetting this, it had AU$5.84m in cash and AU$4.10m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$50.9m.
Since publicly traded Baby Bunting Group shares are worth a total of AU$375.5m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Baby Bunting Group also has more cash than debt, so we're pretty confident it can manage its debt safely.
On top of that, Baby Bunting Group grew its EBIT by 49% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Baby Bunting Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.