Is Belden (NYSE: BDC) Using Too Much Debt?
Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. Above all, Belden inc. (NYSE: BDC) is in debt. But should shareholders be concerned about its use of debt?
Why Does Debt Bring Risk?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider both liquidity and debt levels.
Check out our latest analysis for Belden
How much debt does Belden have?
The graph below, which you can click for more details, shows that Belden was in debt of US $ 1.49 billion as of October 2021; about the same as the year before. However, because it has a cash reserve of US $ 457.8 million, its net debt is less, at around US $ 1.03 billion.
Is Belden’s Balance Sheet Healthy?
According to the latest published balance sheet, Belden had liabilities of US $ 622.4 million due within 12 months and liabilities of US $ 1.77 billion due beyond 12 months. In return, she had $ 457.8 million in cash and $ 421.7 million in receivables due within 12 months. Its liabilities therefore total $ 1.51 billion more than the combination of its cash and short-term receivables.
This deficit is not that big as Belden is worth US $ 2.96 billion, and could therefore probably raise enough capital to consolidate its balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Belden’s debt is 3.0 times its EBITDA, and its EBIT covers its interest charges 4.0 times. This suggests that while debt levels are significant, we would stop calling them problematic. The good news is that Belden has increased its EBIT smoothly by 60% over the past twelve months. Like the milk of human kindness, this type of growth increases resilience, making the business more capable of handling debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Belden’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Belden has generated strong free cash flow equivalent to 70% of its EBIT, roughly what we expected. This hard cash allows him to reduce his debt whenever he wants.
Our point of view
The good news is that Belden’s demonstrated ability to increase his EBIT thrills us like a fluffy puppy does a toddler. But frankly, we think his interest in the cover shakes that impression a bit. Looking at all of the above factors together, it seems to us that Belden can manage her debt quite comfortably. Of course, while this leverage can improve returns on equity, it brings more risk, so it’s worth keeping an eye out for. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, Belden has 2 warning signs (and 1 which is potentially serious) we think you should be aware of.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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