Yahoo Finance BluMetric Environmental (CVE:BLM) Has A Rock Solid Balance Sheet
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that BluMetric Environmental Inc. (CVE:BLM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for BluMetric Environmental
What Is BluMetric Environmental's Debt?
As you can see below, BluMetric Environmental had CA$2.58m of debt at December 2020, down from CA$3.75m a year prior. But on the other hand it also has CA$2.66m in cash, leading to a CA$75.6k net cash position.
How Strong Is BluMetric Environmental's Balance Sheet?
The latest balance sheet data shows that BluMetric Environmental had liabilities of CA$6.94m due within a year, and liabilities of CA$825.2k falling due after that. On the other hand, it had cash of CA$2.66m and CA$9.10m worth of receivables due within a year. So it can boast CA$4.00m more liquid assets than total liabilities.
This surplus liquidity suggests that BluMetric Environmental's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, BluMetric Environmental boasts net cash, so it's fair to say it does not have a heavy debt load!
Even more impressive was the fact that BluMetric Environmental grew its EBIT by 282% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is BluMetric Environmental's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. BluMetric Environmental 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 most recent three years, BluMetric Environmental recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that BluMetric Environmental has net cash of CA$75.6k, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 282% over the last year. So is BluMetric Environmental's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with BluMetric Environmental , and understanding them should be part of your investment process.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
This article by Simply Wall St is general in nature. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
