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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 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. Importantly, Baby Bunting Group Limited (ASX:BBN) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Baby Bunting Group
What Is Baby Bunting Group's Debt?
The image below, which you can click on for greater detail, shows that at June 2021 Baby Bunting Group had debt of AU$9.95m, up from none in one year. But it also has AU$10.9m in cash to offset that, meaning it has AU$934.0k net cash.
How Healthy Is Baby Bunting Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Baby Bunting Group had liabilities of AU$83.2m due within 12 months and liabilities of AU$110.4m due beyond that. Offsetting these obligations, it had cash of AU$10.9m as well as receivables valued at AU$6.92m due within 12 months. So its liabilities total AU$175.9m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Baby Bunting Group has a market capitalization of AU$725.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Baby Bunting Group boasts net cash, so it's fair to say it does not have a heavy debt load!
Importantly Baby Bunting Group's EBIT was essentially flat over the last twelve months. Ideally it can diminish its debt load by kick-starting earnings growth. 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 Baby Bunting Group'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.