Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. As with many other companies Bellway p.l.c. (LON:BWY) makes use of debt. 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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
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What Is Bellway’s Net Debt?
As you can see below, Bellway had UK£130.0m of debt, at July 2022, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds UK£375.3m in cash, so it actually has UK£245.3m net cash.
A Look At Bellway’s Liabilities
We can see from the most recent balance sheet that Bellway had liabilities of UK£971.0m falling due within a year, and liabilities of UK£646.3m due beyond that. Offsetting this, it had UK£375.3m in cash and UK£106.7m in receivables that were due within 12 months. So its liabilities total UK£1.14b more than the combination of its cash and short-term receivables.
Bellway has a market capitalization of UK£2.50b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Bellway also has more cash than debt, so we’re pretty confident it can manage its debt safely.
Another good sign is that Bellway has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Bellway 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, a company can only pay off debt with cold hard cash, not accounting profits. While Bellway 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. In the last three years, Bellway’s free cash flow amounted to 27% of its EBIT, less than we’d expect. That’s not great, when it comes to paying down debt.
While Bellway does have more liabilities than liquid assets, it also has net cash of UK£245.3m. And it impressed us with its EBIT growth of 23% over the last year. So we are not troubled with Bellway’s debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it. Case in point: We’ve spotted 3 warning signs for Bellway 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.