Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.'  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.  We can see that Bristow Group Inc. (NYSE:VTOL) does use debt in its business.  But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy.  Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing.  However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet.  Of course, debt can be an important tool in businesses, particularly capital heavy businesses.  The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Bristow Group Carry?

The chart below, which you can click on for greater detail, shows that Bristow Group had US$544.1m in debt in March 2024; about the same as the year before.    However, because it has a cash reserve of US$140.6m, its net debt is less, at about US$403.4m.  

NYSE:VTOL Debt to Equity History June 4th 2024

How Strong Is Bristow Group's Balance Sheet?

We can see from the most recent balance sheet that Bristow Group had liabilities of US$303.4m falling due within a year, and liabilities of US$792.2m due beyond that.   Offsetting this, it had US$140.6m in cash and US$234.9m in receivables that were due within 12 months.   So its liabilities outweigh the sum of its cash and (near-term) receivables by US$720.0m.  

This deficit is considerable relative to its market capitalization of US$1.02b, so it does suggest shareholders should keep an eye on Bristow Group's use of debt.  Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.  

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover).  Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

While we wouldn't worry about Bristow Group's net debt to EBITDA ratio of 2.5, we think its super-low interest cover of 2.4 times is a sign of high leverage.   It seems that the business incurs large depreciation and amortisation charges, so maybe its debt load is heavier than it would first appear, since EBITDA is arguably a generous measure of earnings.   So shareholders should probably be aware that interest expenses appear to have really impacted the business lately.        Shareholders should be aware that Bristow Group's EBIT was down 97% last year.   If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster.      When analysing debt levels, the balance sheet is the obvious place to start.  But ultimately the future profitability of the business will decide if Bristow Group can strengthen its balance sheet over time.  So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash.   So we always check how much of that EBIT is translated into free cash flow.    Considering the last three years, Bristow Group actually recorded a cash outflow, overall.  Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.  

Our View

We'd go so far as to say Bristow Group's EBIT growth rate was disappointing.    Having said that, its ability handle its debt, based on its EBITDA, isn't such a worry.      Overall, it seems to us that Bristow Group's balance sheet is really quite a risk to the business.  So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say.    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 Bristow Group has   3 warning signs (and 1 which is a bit unpleasant)  we think you should know about.  

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.