St Barbara (ASX:SBM) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies St Barbara Limited (ASX:SBM) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for St Barbara

What Is St Barbara's Net Debt?

As you can see below, St Barbara had AU$101.4m of debt at December 2020, down from AU$106.1m a year prior. However, it does have AU$118.7m in cash offsetting this, leading to net cash of AU$17.3m.

How Strong Is St Barbara's Balance Sheet?

We can see from the most recent balance sheet that St Barbara had liabilities of AU$108.1m falling due within a year, and liabilities of AU$489.1m due beyond that. On the other hand, it had cash of AU$118.7m and AU$31.6m worth of receivables due within a year. So it has liabilities totalling AU$447.0m more than its cash and near-term receivables, combined.

St Barbara has a market capitalization of AU$1.52b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, St Barbara boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that St Barbara grew its EBIT by 13% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine St Barbara's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. St Barbara may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, St Barbara recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

Although St Barbara's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of AU$17.3m. The cherry on top was that in converted 72% of that EBIT to free cash flow, bringing in AU$173m. So we don't think St Barbara's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for St Barbara you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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