David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We can see that B&G Foods, Inc. (NYSE: BGS) uses debt in its operations. But does this debt worry shareholders?
When is debt a problem?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.
See our latest analysis for B&G Foods
How much debt does B&G Foods have?
As you can see below, at the end of October 2021, B&G Foods had $2.41 billion in debt, up from $1.80 billion a year ago. Click on the image for more details. And he doesn’t have a lot of cash, so his net debt is about the same.
How strong is B&G Foods’ balance sheet?
According to the last published balance sheet, B&G Foods had liabilities of $299.5 million due within 12 months and liabilities of $2.82 billion due beyond 12 months. In compensation for these obligations, it had cash of US$27.1 million as well as receivables valued at US$187.0 million and maturing within 12 months. It therefore has liabilities totaling $2.90 billion more than its cash and short-term receivables, combined.
The deficiency here weighs heavily on the $1.90 billion business itself, like a child struggling under the weight of a huge backpack full of books, his gym gear and a trumpet. . So we definitely think shareholders need to watch this one closely. Ultimately, B&G Foods would likely need a major recapitalization if its creditors were to demand repayment.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).
B&G Foods shareholders face the double whammy of a high net debt to EBITDA ratio (7.2) and fairly low interest coverage, as EBIT is only 2.4 times expenses of interests. This means that we would consider him to be heavily indebted. Investors should also be troubled by the fact that B&G Foods has seen its EBIT fall by 14% in the last twelve months. If things continue like this, dealing with debt will be about as easy as putting an angry house cat in its travel box. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether B&G Foods can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, B&G Foods has recorded free cash flow of 38% of its EBIT, which is lower than expected. This low cash conversion makes debt management more difficult.
Our point of view
To be frank, B&G Foods’ level of total liabilities and track record of managing its debt, based on its EBITDA, makes us rather uncomfortable with its level of leverage. But at least its EBIT to free cash flow conversion isn’t that bad. Considering all of the above factors, it seems that B&G Foods is too much in debt. That kind of risk is acceptable to some, but it certainly doesn’t float our boat. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 4 warning signs for B&G Foods you should be aware, and 2 of them don’t suit us too much.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.