Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a 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. Like many other companies Broadwind, Inc. (NASDAQ:BWEN) uses debt. But should shareholders worry about its use of debt?
When is debt a problem?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own 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. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.
What is Broadwind’s debt?
As you can see below, Broadwind had US$5.73 million in debt as of September 2021, up from US$17.9 million the previous year. However, since he has a cash reserve of $2.34 million, his net debt is less, at around $3.40 million.
How healthy is Broadwind’s balance sheet?
We can see from the most recent balance sheet that Broadwind had liabilities of US$34.6 million due in one year, and liabilities of US$22.8 million due beyond. In compensation for these obligations, it had cash of US$2.34 million as well as receivables valued at US$18.1 million and maturing within 12 months. It therefore has liabilities totaling $36.9 million more than its cash and short-term receivables, combined.
When you consider that shortfall exceeds the company’s US$32.5 million market capitalization, you might well be inclined to take a close look at the balance sheet. In theory, extremely large dilution would be required if the company were forced to repay its debts by raising capital at the current share price. 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 Broadwind can strengthen its balance sheet over time. So if you want to see what the pros think, you might find this free analyst earnings forecast report Be interesting.
Year-over-year, Broadwind posted a loss in EBIT and saw its revenue fall to US$160 million, a decline of 23%. To be honest, that doesn’t bode well.
Not only did Broadwind’s revenues fall over the past twelve months, but it also produced negative earnings before interest and taxes (EBIT). Its EBIT loss was US$10 million. When we look at this alongside significant liabilities, we are not particularly confident in the business. We would like to see strong improvements in the short term before getting too interested in the title. Not least because he burned $4.5 million in negative free cash flow over the past year. So suffice it to say that we consider the stock to be risky. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we have identified 5 warning signs for Broadwind (1 makes us a little uncomfortable) you should be aware.
If after all this you are more interested in a fast growing company with a strong balance sheet, then check out our list of net cash growth stocks without delay.
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