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 Mr. Bricolage SA (EPA:MRB) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Mr. Bricolage
What Is Mr. Bricolage's Debt?
As you can see below, at the end of June 2019, Mr. Bricolage had €110.8m of debt, up from €99.5m a year ago. Click the image for more detail. However, it also had €17.3m in cash, and so its net debt is €93.5m.
How Healthy Is Mr. Bricolage's Balance Sheet?
According to the last reported balance sheet, Mr. Bricolage had liabilities of €355.4m due within 12 months, and liabilities of €53.6m due beyond 12 months. Offsetting these obligations, it had cash of €17.3m as well as receivables valued at €69.9m due within 12 months. So it has liabilities totalling €321.9m more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the €30.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet." So we definitely think shareholders need to watch this one closely. At the end of the day, Mr. Bricolage would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Mr. Bricolage will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Mr. Bricolage reported revenue of €452m, which is a gain of 23%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.