Yahoo Finance Is A.G. BARR (LON:BAG) A Risky Investment?
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?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
See 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 as of January 2021 A.G. BARR had UK£2.90m of debt, an increase on none, over one year. However, it does have UK£52.9m in cash offsetting this, leading to net cash of UK£50.0m.
How Healthy Is A.G. BARR's Balance Sheet?
The latest balance sheet data shows that A.G. BARR had liabilities of UK£49.4m due within a year, and liabilities of UK£23.9m falling due after that. On the other hand, it had cash of UK£52.9m and UK£38.3m worth of receivables due within a year. So it actually has UK£17.9m more liquid assets than total liabilities.
This short term liquidity is a sign that A.G. BARR could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that A.G. BARR has more cash than debt is arguably a good indication that it can manage its debt safely.
On the other hand, A.G. BARR's EBIT dived 12%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if A.G. BARR can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept 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. During the last three years, A.G. BARR generated free cash flow amounting to a very robust 90% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
Summing up
While it is always sensible to investigate a company's debt, in this case A.G. BARR has UK£50.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of UK£44m, being 90% of its EBIT. So is A.G. BARR's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for A.G. BARR that you should be aware of before investing here.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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