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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.' 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. We note that Billington Holdings Plc (LON:BILN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Billington Holdings
What Is Billington Holdings's Debt?
As you can see below, Billington Holdings had UK£1.36m of debt at June 2020, down from UK£1.63m a year prior. However, its balance sheet shows it holds UK£17.5m in cash, so it actually has UK£16.1m net cash.
How Strong Is Billington Holdings's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Billington Holdings had liabilities of UK£20.6m due within 12 months and liabilities of UK£176.0k due beyond that. Offsetting these obligations, it had cash of UK£17.5m as well as receivables valued at UK£8.67m due within 12 months. So it can boast UK£5.37m more liquid assets than total liabilities.
This excess liquidity suggests that Billington Holdings is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Billington Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
In fact Billington Holdings's saving grace is its low debt levels, because its EBIT has tanked 32% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Billington Holdings's earnings that will influence how the balance sheet holds up in the future. 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.