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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Microbix Biosystems Inc. (TSE:MBX) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.
What Is Microbix Biosystems's Net Debt?
As you can see below, at the end of June 2021, Microbix Biosystems had CA$5.91m of debt, up from CA$5.55m a year ago. Click the image for more detail. But it also has CA$7.51m in cash to offset that, meaning it has CA$1.59m net cash.
How Strong Is Microbix Biosystems' Balance Sheet?
The latest balance sheet data shows that Microbix Biosystems had liabilities of CA$4.18m due within a year, and liabilities of CA$4.97m falling due after that. On the other hand, it had cash of CA$7.51m and CA$4.18m worth of receivables due within a year. So it actually has CA$2.54m more liquid assets than total liabilities.
This short term liquidity is a sign that Microbix Biosystems could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Microbix Biosystems boasts net cash, so it's fair to say it does not have a heavy debt load!
Notably, Microbix Biosystems made a loss at the EBIT level, last year, but improved that to positive EBIT of CA$3.2m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Microbix Biosystems's ability to maintain a healthy balance sheet going forward. 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. While Microbix Biosystems has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, Microbix Biosystems burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
While we empathize with investors who find debt concerning, you should keep in mind that Microbix Biosystems has net cash of CA$1.59m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Microbix Biosystems's balance sheet. 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. Be aware that Microbix Biosystems is showing 2 warning signs in our investment analysis , you should know about...
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.
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.
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