Yahoo Finance Health Check: How Prudently Does Blackline Safety (CVE:BLN) Use Debt?
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 can see that Blackline Safety Corp. (CVE:BLN) does use debt in its business. But should shareholders be worried about its use of debt?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Blackline Safety
What Is Blackline Safety's Debt?
You can click the graphic below for the historical numbers, but it shows that as of April 2019 Blackline Safety had CA$500.0k of debt, an increase on CA$400.0k, over one year. But on the other hand it also has CA$33.7m in cash, leading to a CA$33.2m net cash position.
How Healthy Is Blackline Safety's Balance Sheet?
The latest balance sheet data shows that Blackline Safety had liabilities of CA$11.7m due within a year, and liabilities of CA$2.34m falling due after that. Offsetting this, it had CA$33.7m in cash and CA$8.71m in receivables that were due within 12 months. So it can boast CA$28.3m more liquid assets than total liabilities.
This short term liquidity is a sign that Blackline Safety could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Blackline Safety boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Blackline Safety can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Blackline Safety managed to grow its revenue by 74%, to CA$25m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Blackline Safety?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Blackline Safety had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of CA$13m and booked a CA$9.3m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CA$34m. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Blackline Safety may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Blackline Safety insider transactions.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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