Brand Concepts (NSE:BCONCEPTS) seems to be using debt quite wisely

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Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. 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 note that Limited brand concepts (NSE:BCONCEPTS) has debt on its balance sheet. But does this debt worry shareholders?

When is debt a problem?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. 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 expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, many companies use debt to finance their growth, without any negative consequences. When we look at debt levels, we first consider cash and debt levels, together.

Discover our latest analysis for Brand Concepts

How much debt does Brand Concepts have?

You can click on the graph below for historical figures, but it shows that as of March 2022, Brand Concepts had ₹323.5 million in debt, an increase from ₹294.5 million, year on year . However, he has ₹34.8 million of cash to offset this, resulting in a net debt of around ₹288.7 million.

NSEI: BCONCEPTS Debt to Equity August 13, 2022

A Look at Brand Concepts’ Responsibilities

We can see from the most recent balance sheet that Brand Concepts had liabilities of ₹458.2m due within a year, and liabilities of ₹116.8m due beyond. As compensation for these obligations, it had cash of ₹34.8 million as well as receivables valued at ₹301.7 million due within 12 months. It therefore has liabilities totaling £238.6 million more than its cash and short-term receivables, combined.

Given that publicly traded Brand Concepts shares are worth a total of ₹1.34 billion, it seems unlikely that this level of liabilities will pose a major threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future.

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 ).

While Brand Concepts has a fairly reasonable net debt to EBITDA ratio of 2.0, its interest coverage looks low at 2.3. This leads us to wonder if the company is paying high interest because it is considered risky. Regardless, there is no doubt that the stock uses significant leverage. We also note that Brand Concepts improved its EBIT from last year’s loss to a positive result of ₹113m. There is no doubt that we learn the most about debt from the balance sheet. But it is the profits of Brand Concepts that will influence the balance sheet in the future. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

Finally, a company can only repay its debts with cold hard cash, not with book profits. It is therefore worth checking how much of earnings before interest and tax (EBIT) is supported by free cash flow. Fortunately for all shareholders, Brand Concepts has actually produced more free cash flow than EBIT over the past year. This kind of high cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our point of view

Based on our analysis, Brand Concepts’ conversion of EBIT to free cash flow should indicate that it won’t have too many debt issues. However, our other observations were not so encouraging. In particular, interest coverage gives us chills. When we consider all the elements cited above, it seems to us that Brand Concepts manages its debt quite well. But be warned: we believe debt levels are high enough to warrant continued monitoring. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. We have identified 2 warning signs with Brand Concepts (at least 1, which makes us a little uneasy), and understanding them should be part of your investment process.

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

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.

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