Is Berkeley Group Holdings (LON: BKG) Using Too Much Debt?
David Iben put it well when he said, âVolatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We notice that The Berkeley Holdings plc group (LON: BKG) has debt on its balance sheet. But should shareholders be concerned about its use of debt?
What risk does debt entail?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
Check out our latest analysis for Berkeley Group Holdings
What is the net debt of Berkeley Group Holdings?
The image below, which you can click for more details, shows that in October 2021, Berkeley Group Holdings was in debt of Â£ 400.0million, up from Â£ 300million in a year. But on the other hand, he also has Â£ 1.25bn in cash, which leads to a net cash position of Â£ 845.5m.
How healthy is Berkeley Group Holdings’ balance sheet?
Zooming in on the latest balance sheet data, we can see that Berkeley Group Holdings had a liability of Â£ 1.76bn due within 12 months and a liability of Â£ 788.3m beyond. On the other hand, he had Â£ 1.25bn in cash and Â£ 84.9m worth of debts due within one year. Its liabilities therefore total Â£ 1.22 billion more than the combination of its cash and short-term receivables.
This deficit is not that big as Berkeley Group Holdings is worth Â£ 5.31 billion, so it could probably raise enough capital to consolidate its balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution. While it has some liabilities to note, Berkeley Group Holdings also has more cash than debt, so we’re pretty confident it can handle its debt safely.
Another good sign is that Berkeley Group Holdings was able to increase its EBIT by 24% in twelve months, making it easier to pay off debt. When analyzing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Berkeley Group Holdings’ ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. Berkeley Group Holdings may have net cash on the balance sheet, but it’s always interesting to consider the extent to which the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Over the past three years, Berkeley Group Holdings has generated strong free cash flow equivalent to 63% of its EBIT, roughly what we expected. This free cash flow puts the business in a good position to repay debt, if any.
Although Berkeley Group Holdings has more liabilities than liquid assets, it also has net cash of Â£ 845.5million. And we liked the appearance of the 24% year-over-year EBIT growth from last year. So is Berkeley Group Holdings’ debt a risk? It does not seem to us. When analyzing debt levels, the balance sheet is the obvious place to start. But at the end of the day, every business can contain risks that exist off the balance sheet. Concrete example: we have spotted 1 warning sign for Berkeley Group Holdings you must be aware.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.
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