David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Barnes Group Inc. (NYSE:B) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Barnes Group
How Much Debt Does Barnes Group Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Barnes Group had US$920.5m of debt, an increase on US$590.3m, over one year. However, it also had US$94.9m in cash, and so its net debt is US$825.6m.
A Look At Barnes Group's Liabilities
Zooming in on the latest balance sheet data, we can see that Barnes Group had liabilities of US$373.6m due within 12 months and liabilities of US$1.21b due beyond that. Offsetting this, it had US$94.9m in cash and US$392.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.10b.
This deficit isn't so bad because Barnes Group is worth US$2.77b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.