Yahoo Finance Does Brink's (NYSE:BCO) Have A Healthy Balance Sheet?
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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that The Brink's Company (NYSE:BCO) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
See our latest analysis for Brink's
What Is Brink's's Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Brink's had debt of US$1.64b, up from US$1.23b in one year. However, because it has a cash reserve of US$305.1m, its net debt is less, at about US$1.34b.
How Strong Is Brink's's Balance Sheet?
We can see from the most recent balance sheet that Brink's had liabilities of US$888.8m falling due within a year, and liabilities of US$2.63b due beyond that. Offsetting these obligations, it had cash of US$305.1m as well as receivables valued at US$678.3m due within 12 months. So its liabilities total US$2.54b more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Brink's has a market capitalization of US$4.50b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Brink's's debt is 3.2 times its EBITDA, and its EBIT cover its interest expense 3.1 times over. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. Fortunately, Brink's grew its EBIT by 2.3% in the last year, slowly shrinking its debt relative to earnings. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Brink's'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Brink's produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
Our View
Both Brink's's interest cover and its net debt to EBITDA were discouraging. But its not so bad at converting EBIT to free cash flow. When we consider all the factors discussed, it seems to us that Brink's is taking some risks with its use of debt. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. Given our hesitation about the stock, it would be good to know if Brink's insiders have sold any shares recently. You click here to find out if insiders have sold recently.
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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