Is Burberry Group plc Dependent On Debt?

Are debt levels at Burberry Group plc (LON: BRBY) becoming unaffordable and detrimental to the company’s future prospects?

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A Challenging Start To 2014

Concerns surrounding the sustainability of the emerging market growth story hit shares in Burberry (LSE: BRBY) (NASDAQOTH: BURBY.US) a little harder than most stocks in the FTSE 100.

Indeed, while the index was down just over 4% at its lowest point thus far in 2014, Burberry saw its share price slip by over 7%. This is most likely due to emerging markets not only representing a significant proportion of the company’s current revenue, but also a result of their having considerable growth potential for Burberry in future years.

Of course, much of this growth potential is priced in, which is probably why shares fell to a greater extent than the index. However, is the market pricing in the full extent of Burberry’s financial risk, too? Or is it a company that is dependent upon debt (as well as emerging markets) for its future growth potential?

Excessive Debt?

With a debt to equity ratio of just 12.3%, Burberry has an exceptionally low level of debt. Indeed, for every £1 of net assets, the company has just £0.123 of debt, which is very low indeed. This level of debt could be increased significantly so as to help speed up the development of the business in emerging markets, with a higher amount of debt offering the potential to increase the size and rate of investment spend. This could mean higher sales —  and profits — in future years.

Further evidence of Burberry’s ability to take on a larger amount of debt can be seen in its interest coverage ratio, which is extremely high at 70. This means that Burberry was able to cover its net interest payments over 70 times in 2013 without exhausting operating profit. This highlights not only the low debt levels that the company currently has, but its significant profitability, too.

Looking Ahead

Indeed, with earnings per share (EPS) forecast to increase by 8% in the financial year to 31 March 2014, and by 12% in the following year, Burberry remains a relatively attractive growth stock. With a strong balance sheet containing very low debt levels, attractive profitability and a forward price to earnings (P/E) ratio of 17.8, Burberry could prove to be a strong performer in 2014 and beyond.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter does not own shares in Burberry. The Motley Fool has recommended Burberry.

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