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Highlights
- BSA Limited has increased its debt but maintains a low net debt to EBITDA ratio, indicating manageable risk.
- The company's market capitalization suggests it could raise capital if needed to strengthen its balance sheet.
- BSA's significant EBIT growth enhances its ability to manage existing debt obligations.
When evaluating a company’s financial health, examining its balance sheet is essential. For BSA Limited (ASX:BSA), the presence of debt raises important questions about risk management and shareholder value. While debt is often necessary for funding growth, it can become a liability if not handled correctly.
Understanding Debt Risks
Debt becomes a concern when a company struggles to meet its financial obligations, either through cash flow or by raising capital. In extreme situations, this can lead to bankruptcy if creditors cannot be paid. More commonly, companies might find themselves forced to issue shares at low prices to stabilize their balance sheets, leading to shareholder dilution. Conversely, many businesses successfully use debt to fuel growth without facing adverse consequences.
To assess the risk associated with BSA's debt, both the amount of debt and cash reserves must be considered.
Current Debt Levels at BSA
As of June 2024, BSA reported AU$8 million in debt, an increase from AU$4 million the previous year. The company has cash reserves of AU$1.57 million, resulting in a net debt of AU$6.43 million.
Liabilities and Cash Flow Analysis
The most recent balance sheet indicates that BSA has liabilities totaling AU$52.5 million due within a year, with an additional AU$5.2 million due later. However, the company also has cash of AU$1.57 million and receivables valued at AU$33.4 million expected within the next 12 months. In total, BSA’s liabilities exceed its liquid assets by AU$22.7 million.
This situation might seem concerning, but given BSA's market capitalization of AU$74.6 million, the company has the potential to strengthen its financial position by raising additional capital if necessary.
Evaluating Debt Management
A deeper analysis of BSA's debt involves examining its earnings relative to its obligations. The net debt to EBITDA ratio stands at a low 0.30, indicating a manageable level of debt compared to its earnings. Furthermore, BSA's EBIT is 14.6 times larger than its interest expense, suggesting that the company comfortably covers its debt costs.
Impressively, BSA has achieved a remarkable 58% growth in EBIT over the past year, which enhances its capacity to manage existing debt. While understanding the balance sheet is critical, future earnings will play a crucial role in determining BSA's long-term financial health.
BSA Limited does carry debt, its low debt levels relative to earnings and significant EBIT growth indicate that the company is navigating its financial obligations effectively. Monitoring these factors will be essential for assessing the ongoing risk associated with its capital structure.
