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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, The Berkeley Group Holdings plc (LON:BKG) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Berkeley Group Holdings
What Is Berkeley Group Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that as of April 2022 Berkeley Group Holdings had UK£660.0m of debt, an increase on UK£300.0m, over one year. However, it does have UK£928.9m in cash offsetting this, leading to net cash of UK£268.9m.
How Healthy Is Berkeley Group Holdings' Balance Sheet?
We can see from the most recent balance sheet that Berkeley Group Holdings had liabilities of UK£1.97b falling due within a year, and liabilities of UK£1.48b due beyond that. Offsetting these obligations, it had cash of UK£928.9m as well as receivables valued at UK£150.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£2.37b.
Berkeley Group Holdings has a market capitalization of UK£4.15b, so it could very likely raise cash to ameliorate 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. While it does have liabilities worth noting, Berkeley Group Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.
While Berkeley Group Holdings doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Berkeley Group Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.