The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. We note that Boot Barn Holdings, Inc. (NYSE:BOOT) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company’s debt levels is to consider its cash and debt together.
What Is Boot Barn Holdings’s Debt?
As you can see below, Boot Barn Holdings had US$49.4m of debt at September 2021, down from US$177.2m a year prior. However, it also had US$39.5m in cash, and so its net debt is US$9.85m.
How Strong Is Boot Barn Holdings’ Balance Sheet?
According to the last reported balance sheet, Boot Barn Holdings had liabilities of US$280.5m due within 12 months, and liabilities of US$275.7m due beyond 12 months. Offsetting these obligations, it had cash of US$39.5m as well as receivables valued at US$13.2m due within 12 months. So its liabilities total US$503.4m more than the combination of its cash and short-term receivables.
Of course, Boot Barn Holdings has a market capitalization of US$3.49b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. But either way, Boot Barn Holdings has virtually no net debt, so it’s fair to say it does not have a heavy debt load!
We measure a company’s debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
Boot Barn Holdings has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.048 and EBIT of 21.9 times the interest expense. So relative to past earnings, the debt load seems trivial. Better yet, Boot Barn Holdings grew its EBIT by 215% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There’s no doubt that we learn most about debt from the balance sheet.