Warren Buffett said: “Volatility is far from synonymous with risk”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We can see that BrightView Holdings, Inc. (NYSE: BV) uses debt in its business. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
What is BrightView Holdings’ net debt?
The graph below, which you can click for more details, shows that BrightView Holdings had $ 1.14 billion in debt as of September 2021; about the same as the year before. However, it has $ 123.7 million in cash offsetting that, leading to net debt of around $ 1.02 billion.
NYSE: BV Debt to Equity History December 17, 2021
How healthy is BrightView Holdings’ balance sheet?
The latest balance sheet data shows BrightView Holdings had liabilities of US $ 496.1 million due within one year, and liabilities of US $ 1.40 billion due after that. On the other hand, he had cash of US $ 123.7 million and US $ 498.3 million in receivables due within one year. Its liabilities therefore total US $ 1.27 billion more than the combination of its cash and short-term receivables.
This is a mountain of leverage compared to its market cap of US $ 1.48 billion. If its lenders asked it to consolidate the balance sheet, shareholders would likely face severe dilution.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its earnings before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
BrightView Holdings’ debt is 3.9 times its EBITDA, and its EBIT covers 3.0 times its interest expense. This suggests that while debt levels are significant, we would stop calling them problematic. However, shareholders should remember that BrightView Holdings has actually increased its EBIT by 133% over the past 12 months. If he can continue on this path, he will be able to deleverage with relative ease. When analyzing debt levels, the balance sheet is the obvious place to start. But ultimately, the company’s future profitability will decide whether BrightView Holdings can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, BrightView Holdings has actually generated more free cash flow than EBIT. This kind of cash conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.
Our point of view
BrightView Holdings’ EBIT conversion to free cash flow was a real asset in this analysis, as was its EBIT growth rate. That said, its interest coverage does make us somewhat aware of potential future risks to the balance sheet. When you consider all of the above, it seems to us that BrightView Holdings is managing its debt quite well. That said, the load is heavy enough that we recommend that any shareholder watch it closely. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for BrightView Holdings (of which 1 is significant!) that you should know.
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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