Is Broadridge Financial Solutions (NYSE:BR) using too much debt?

Warren Buffett said: “Volatility is far from synonymous with risk. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Broadridge Financial Solutions, Inc. (NYSE:BR) uses debt. But should shareholders worry about its use of debt?

Why is debt risky?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.

Check out our latest analysis for Broadridge Financial Solutions

How much debt does Broadridge Financial Solutions have?

As you can see below, at the end of September 2021, Broadridge Financial Solutions had $4.17 billion in debt, up from $1.78 billion a year ago. Click on the image for more details. On the other hand, it has $317.3 million in cash, resulting in a net debt of around $3.85 billion.

NYSE:BR Debt to Equity January 31, 2022

How healthy is Broadridge Financial Solutions’ balance sheet?

According to the last published balance sheet, Broadridge Financial Solutions had liabilities of $966.8 million due within 12 months and liabilities of $5.31 billion due beyond 12 months. As compensation for these obligations, it had cash of US$317.3 million and receivables valued at US$730.0 million due within 12 months. Thus, its liabilities total $5.23 billion more than the combination of its cash and short-term receivables.

While that might sound like a lot, it’s not that bad since Broadridge Financial Solutions has a huge market capitalization of US$18.4 billion, so it could probably bolster its balance sheet by raising capital if needed. But it is clear that it must be carefully examined whether he can manage his debt without dilution.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without depreciation and amortization charges.

Broadridge Financial Solutions has a debt to EBITDA ratio of 3.6, which signals significant debt, but is still quite reasonable for most types of businesses. But its EBIT was around 11.1 times its interest expense, implying that the company isn’t really paying a high cost to maintain that level of leverage. Even if the low cost turns out to be unsustainable, that’s a good sign. If Broadridge Financial Solutions can continue to grow EBIT at last year’s rate of 12% over last year, then it will find its leverage more manageable. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Broadridge Financial Solutions can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, a company can only repay its debts with cold hard cash, not with book profits. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Broadridge Financial Solutions has recorded free cash flow of 79% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This cold hard cash allows him to reduce his debt whenever he wants.

Our point of view

The good news is that Broadridge Financial Solutions’ demonstrated ability to convert EBIT to free cash flow delights us like a fluffy puppy does a toddler. But truth be told, we think its net debt to EBITDA somewhat undermines that impression. When we consider the range of factors above, it appears that Broadridge Financial Solutions is quite sensitive with its use of debt. This means they take on a bit more risk, hoping to increase shareholder returns. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. We have identified 2 warning signs with Broadridge Financial Solutions (at least 1, which is potentially serious), and understanding them should be part of your investment process.

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.