Yahoo Finance Does A.G. BARR (LON:BAG) Have A Healthy Balance Sheet?
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 can see that A.G. BARR p.l.c. (LON:BAG) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for A.G. BARR
What Is A.G. BARR's Debt?
You can click the graphic below for the historical numbers, but it shows that A.G. BARR had UK£4.40m of debt in July 2019, down from UK£12.7m, one year before. However, its balance sheet shows it holds UK£9.00m in cash, so it actually has UK£4.60m net cash.
How Healthy Is A.G. BARR's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that A.G. BARR had liabilities of UK£64.6m due within 12 months and liabilities of UK£29.9m due beyond that. Offsetting these obligations, it had cash of UK£9.00m as well as receivables valued at UK£56.4m due within 12 months. So it has liabilities totalling UK£29.1m more than its cash and near-term receivables, combined.
Of course, A.G. BARR has a market capitalization of UK£625.1m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, A.G. BARR boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, A.G. BARR saw its EBIT drop by 2.4% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine A.G. BARR's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While A.G. BARR has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, A.G. BARR recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing up
We could understand if investors are concerned about A.G. BARR's liabilities, but we can be reassured by the fact it has has net cash of UK£4.60m. And it impressed us with free cash flow of UK£30m, being 71% of its EBIT. So is A.G. BARR's debt a risk? It doesn't seem so to us. We'd be motivated to research the stock further if we found out that A.G. BARR insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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