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.' 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 Dutch Bros Inc. (NYSE:BROS) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Dutch Bros's Debt?
The chart below, which you can click on for greater detail, shows that Dutch Bros had US$246.2m in debt in March 2024; about the same as the year before. But on the other hand it also has US$262.7m in cash, leading to a US$16.5m net cash position.
A Look At Dutch Bros' Liabilities
The latest balance sheet data shows that Dutch Bros had liabilities of US$146.5m due within a year, and liabilities of US$1.23b falling due after that. Offsetting these obligations, it had cash of US$262.7m as well as receivables valued at US$11.7m due within 12 months. So its liabilities total US$1.10b more than the combination of its cash and short-term receivables.
Since publicly traded Dutch Bros shares are worth a total of US$5.63b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Dutch Bros boasts net cash, so it's fair to say it does not have a heavy debt load!
Notably, Dutch Bros's EBIT launched higher than Elon Musk, gaining a whopping 463% on last year. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Dutch Bros can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Dutch Bros may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, Dutch Bros saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing Up
While Dutch Bros does have more liabilities than liquid assets, it also has net cash of US$16.5m. And we liked the look of last year's 463% year-on-year EBIT growth. So we don't have any problem with Dutch Bros's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Dutch Bros you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.