Billington Holdings (LON:BILN) Has A Pretty Healthy Balance Sheet

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Billington Holdings Plc (LON:BILN) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Billington Holdings

What Is Billington Holdings's Debt?

As you can see below, Billington Holdings had UK£1.13m of debt at June 2021, down from UK£1.38m a year prior. But on the other hand it also has UK£13.2m in cash, leading to a UK£12.1m net cash position.

How Strong Is Billington Holdings' Balance Sheet?

According to the last reported balance sheet, Billington Holdings had liabilities of UK£18.4m due within 12 months, and liabilities of UK£1.35m due beyond 12 months. Offsetting this, it had UK£13.2m in cash and UK£5.82m in receivables that were due within 12 months. So it has liabilities totalling UK£701.0k more than its cash and near-term receivables, combined.

Since publicly traded Billington Holdings shares are worth a total of UK£30.7m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Billington Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Billington Holdings's load is not too heavy, because its EBIT was down 53% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Billington Holdings'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 company can only pay off debt with cold hard cash, not accounting profits. Billington Holdings 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, Billington Holdings recorded free cash flow worth 66% 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

We could understand if investors are concerned about Billington Holdings's liabilities, but we can be reassured by the fact it has has net cash of UK£12.1m. The cherry on top was that in converted 66% of that EBIT to free cash flow, bringing in -UK£4.3m. So we don't have any problem with Billington Holdings's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 5 warning signs for Billington Holdings (2 shouldn't be ignored!) that you should be aware of before investing here.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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