Yahoo Finance Here's Why Burberry Group (LON:BRBY) Can Manage Its Debt Responsibly
Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that Burberry Group plc (LON:BRBY) 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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Burberry Group
What Is Burberry Group's Debt?
The image below, which you can click on for greater detail, shows that at September 2019 Burberry Group had debt of UK£45.4m, up from UK£17.9m in one year. But on the other hand it also has UK£715.4m in cash, leading to a UK£670.0m net cash position.
A Look At Burberry Group's Liabilities
We can see from the most recent balance sheet that Burberry Group had liabilities of UK£911.7m falling due within a year, and liabilities of UK£1.01b due beyond that. Offsetting this, it had UK£715.4m in cash and UK£248.2m in receivables that were due within 12 months. So it has liabilities totalling UK£960.7m more than its cash and near-term receivables, combined.
Since publicly traded Burberry Group shares are worth a total of UK£5.20b, it seems unlikely that this level of liabilities would be a major threat. 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, Burberry Group boasts net cash, so it's fair to say it does not have a heavy debt load!
Burberry Group's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Burberry Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Burberry Group 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, Burberry Group generated free cash flow amounting to a very robust 94% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
Summing up
While Burberry Group does have more liabilities than liquid assets, it also has net cash of UK£670.0m. And it impressed us with free cash flow of UK£350m, being 94% of its EBIT. So is Burberry Group's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Burberry Group you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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