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.' 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. Importantly, Biglari Holdings Inc. (NYSE:BH.A) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Biglari Holdings
How Much Debt Does Biglari Holdings Carry?
As you can see below, at the end of March 2023, Biglari Holdings had US$6.50m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$119.0m in cash, so it actually has US$112.5m net cash.
A Look At Biglari Holdings' Liabilities
Zooming in on the latest balance sheet data, we can see that Biglari Holdings had liabilities of US$130.8m due within 12 months and liabilities of US$155.2m due beyond that. Offsetting these obligations, it had cash of US$119.0m as well as receivables valued at US$27.0m due within 12 months. So its liabilities total US$140.0m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Biglari Holdings is worth US$636.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Biglari Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Biglari Holdings grew its EBIT by 54% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Biglari Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Biglari Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Biglari Holdings actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing Up
While Biglari Holdings does have more liabilities than liquid assets, it also has net cash of US$112.5m. The cherry on top was that in converted 290% of that EBIT to free cash flow, bringing in US$100m. So we don't think Biglari Holdings's use of debt is risky. 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. For instance, we've identified 1 warning sign for Biglari Holdings that you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.