Howard Marks put it well when he said that instead of worrying about stock price volatility, “the possibility of a deadweight loss is a risk I worry about … and every practical investor I know worries about.” The smart money seems to know that debt, which is usually associated with bankruptcy, is a very important factor when evaluating how risky a company is. It is important to note that Bluegreen Vacations Holding Corporation (NYSE: BVH) is in debt. But should shareholders be concerned about using debt?
When does the debt problem arise?
Debt helps a business until it has problems paying off new capital or free cash flow. An integral part of capitalism is the process of “creative destruction” in which failing businesses are ruthlessly liquidated by their bankers. However, the more common (but still costly) case is that a company is forced to issue shares at undervalued prices, constantly diluting shareholders, simply to strengthen its balance sheet. However, by replacing dilution, debt can be an extremely good vehicle for businesses that need capital to invest in high-yield growth. The first thing to do when considering how much debt a business is using is to look at its cash and debt together.
Check out our latest analysis on Bluegreen Vacations Holding
What is Bluegreen Vacations Holding’s debt?
As you can see below, Bluegreen Vacations Holding had a debt of $ 721.7 million as of March 2021, up from $ 822.9 million a year earlier. On the other hand, it has USD 199.2 million in cash, resulting in a net debt of about USD 522.6 million.
Bluegreen Vacations Holding’s Commitments at a Glance
The latest balance sheet shows that Bluegreen Vacations Holding has liabilities of US $ 119.9 million due in one year and liabilities of US $ 849.5 million due thereafter. With this in mind, he had US $ 199.2 million in cash and US $ 405.4 million in receivables due to be settled within 12 months. Thus, its liabilities of US $ 364.9 million are greater than its cash and short-term receivables combined.
This deficit is significant compared to its market capitalization of US $ 449.1 million, so it suggests that shareholders should monitor the use of Bluegreen Vacations Holding’s debt. This suggests that shareholders will be heavily diluted if the company needs to urgently strengthen its balance sheet.
We measure a company’s debt burden in relation to its revenues by looking at its net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), and calculating how easily its earnings before interest and taxes (EBIT) cover the interest. expenses (interest coverage). Thus, we take into account both the absolute amount of the debt and the interest rates paid on it.
Bluegreen Vacations Holding shareholders are facing a double blow: a high net debt to EBITDA ratio (14.1) and rather weak interest rate coverage, as EBIT is only 0.38 times higher than interest expense. The debt burden is significant here. Worse, Bluegreen Vacations Holding’s EBIT is down 71% year-over-year. If profits continue to follow this trajectory, paying off the debt will be more difficult than convincing us to run a marathon in the rain. The balance sheet is undoubtedly the area to focus on when analyzing debt. But it is future earnings that, more than anything else, will determine Bluegreen Vacations Holding’s ability to maintain a healthy balance in the future. So if you are focused on the future you can check this out. is free a report showing analysts’ profit forecasts.
Finally, the company can only pay off its debts in cash, not taking into account profits. Therefore, it is worth checking how much of this EBIT is provided by free cash flow. Over the past three years, Bluegreen Vacations Holding has secured a stable free cash flow of 71% of its EBIT, which is roughly in line with our expectations. This cold cash means he can reduce his debt whenever he wants.
At first glance, Bluegreen Vacations Holding’s interest coverage left us unsure of the stock, and EBIT growth was no more tempting than one empty restaurant on the busiest night of the year. But at least it’s pretty good at converting EBIT to free cash flow; this is encouraging. It is very clear to us that we consider Bluegreen Vacations Holding a rather risky venture because of its balance sheet. For this reason, we are wary of shares and believe that shareholders should closely monitor their liquidity. There is no doubt that the most we learn about debt is from the balance sheet. However, not all investment risk is in the balance sheet – far from it. For example, Bluegreen Vacations Holding has 2 warning signs (and 1 that shouldn’t be ignored) we think you should know.
Of course, if you are the type of investor who prefers to buy stocks without the burden of debt, feel free to discover our exclusive list of net money growth stocks today.
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