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Is Microbix Biosystems (TSE:MBX) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Microbix Biosystems Inc. (TSE:MBX) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Microbix Biosystems

What Is Microbix Biosystems's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Microbix Biosystems had CA$5.25m of debt in March 2022, down from CA$5.87m, one year before. But on the other hand it also has CA$12.2m in cash, leading to a CA$6.95m net cash position.


A Look At Microbix Biosystems' Liabilities

Zooming in on the latest balance sheet data, we can see that Microbix Biosystems had liabilities of CA$3.57m due within 12 months and liabilities of CA$5.57m due beyond that. Offsetting this, it had CA$12.2m in cash and CA$4.58m in receivables that were due within 12 months. So it actually has CA$7.65m 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. Simply put, the fact that Microbix Biosystems has more cash than debt is arguably a good indication that it can manage its debt safely.

Pleasingly, Microbix Biosystems is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 352% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Microbix Biosystems 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Microbix Biosystems 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. In the last two years, Microbix Biosystems created free cash flow amounting to 14% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Microbix Biosystems has CA$6.95m in net cash and a decent-looking balance sheet. And we liked the look of last year's 352% year-on-year EBIT growth. So we are not troubled with Microbix Biosystems's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Microbix Biosystems (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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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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.