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. As with many other companies Bigblu Broadband plc (LON:BBB) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Bigblu Broadband
What Is Bigblu Broadband’s Net Debt?
The image below, which you can click on for greater detail, shows that at November 2019 Bigblu Broadband had debt of UK£20.2m, up from UK£17.0m in one year. However, because it has a cash reserve of UK£5.99m, its net debt is less, at about UK£14.2m.
How Healthy Is Bigblu Broadband’s Balance Sheet?
According to the last reported balance sheet, Bigblu Broadband had liabilities of UK£32.8m due within 12 months, and liabilities of UK£24.8m due beyond 12 months. Offsetting these obligations, it had cash of UK£5.99m as well as receivables valued at UK£5.22m due within 12 months. So its liabilities total UK£46.4m more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of UK£52.4m, so it does suggest shareholders should keep an eye on Bigblu Broadband’s use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Bigblu Broadband can strengthen its balance sheet over time. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Bigblu Broadband wasn’t profitable at an EBIT level, but managed to grow its revenue by 12%, to UK£62m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Importantly, Bigblu Broadband had negative earnings before interest and tax (EBIT), over the last year. To be specific the EBIT loss came in at UK£2.3m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled UK£4.5m in negative free cash flow over the last twelve months. So in short it’s a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We’ve spotted 2 warning signs for Bigblu Broadband you should be aware of.
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.
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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. Thank you for reading.
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