Is Brunswick (NYSE:BC) using too much debt?

Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, Brunswick Society (NYSE:BC) is in debt. But does this debt worry shareholders?

Why is debt risky?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we look at debt levels, we first consider cash and debt levels, together.

See our latest analysis for Braunschweig

What is Brunswick’s debt?

The image below, which you can click on for more details, shows that in April 2022, Brunswick had $2.50 billion in debt, up from $944.7 million in one year. However, since it has a cash reserve of $686.9 million, its net debt is less, at around $1.81 billion.

NYSE: BC Debt to Equity History July 28, 2022

How strong is Brunswick’s balance sheet?

We can see from the most recent balance sheet that Brunswick had liabilities of $1.33 billion due in one year, and liabilities of $2.78 billion beyond. On the other hand, it had a cash position of 686.9 million dollars and 664.7 million dollars of receivables at less than one year. It therefore has liabilities totaling $2.76 billion more than its cash and short-term receivables, combined.

While that might sound like a lot, it’s not too bad since Brunswick has a market capitalization of US$5.66 billion, so it could likely bolster its balance sheet by raising capital if needed. But it is clear that it must be carefully examined whether he can manage his debt without dilution.

We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Brunswick’s net debt to EBITDA ratio of approximately 1.7 suggests only moderate use of debt. And its towering EBIT of 12.6 times its interest expense means that the debt burden is as light as a peacock feather. It should also be noted that Brunswick has increased its EBIT by a very respectable 26% over the past year, improving its ability to service debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Brunswick can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, a business needs free cash flow to pay off its debts; book profits are not enough. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, Brunswick has produced strong free cash flow equivalent to 52% of its EBIT, which is what we expected. This free cash flow puts the company in a good position to repay its debt, should it arise.

Our point of view

The good news is that Brunswick’s demonstrated ability to cover its interest costs with its EBIT delights us like a fluffy puppy does a toddler. But, on a darker note, we’re a bit concerned about his total passive level. All told, it looks like Brunswick can comfortably manage its current level of debt. On the plus side, this leverage can increase shareholder returns, but the potential downside is more risk of loss, so it’s worth keeping an eye on the balance sheet. 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. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for Brunswick (of which 1 is significant!) that you should know.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.

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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