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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Broadridge Financial Solutions, Inc. (NYSE:BR) makes use of debt. But is this debt a concern to shareholders?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Broadridge Financial Solutions
How Much Debt Does Broadridge Financial Solutions Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Broadridge Financial Solutions had US$1.47b of debt, an increase on US$1.05b, over one year. However, because it has a cash reserve of US$273.6m, its net debt is less, at about US$1.20b.
A Look At Broadridge Financial Solutions's Liabilities
According to the last reported balance sheet, Broadridge Financial Solutions had liabilities of US$802.6m due within 12 months, and liabilities of US$1.95b due beyond 12 months. Offsetting this, it had US$273.6m in cash and US$664.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.82b.
Of course, Broadridge Financial Solutions has a titanic market capitalization of US$14.7b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.