Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 Biocorp Production (EPA:ALCOR) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Biocorp Production's Debt?
The image below, which you can click on for greater detail, shows that Biocorp Production had debt of €5.16m at the end of June 2019, a reduction from €6.20m over a year. On the flip side, it has €334.1k in cash leading to net debt of about €4.83m.
How Strong Is Biocorp Production's Balance Sheet?
The latest balance sheet data shows that Biocorp Production had liabilities of €4.65m due within a year, and liabilities of €3.24m falling due after that. Offsetting these obligations, it had cash of €334.1k as well as receivables valued at €5.50m due within 12 months. So its liabilities total €2.06m more than the combination of its cash and short-term receivables.
Since publicly traded Biocorp Production shares are worth a total of €60.7m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Biocorp Production will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Biocorp Production reported revenue of €7.2m, which is a gain of 123%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!
While we can certainly savour Biocorp Production's tasty revenue growth, its negative earnings before interest and tax (EBIT) leaves a bitter aftertaste. To be specific the EBIT loss came in at €1.3m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €5.0m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. For riskier companies like Biocorp Production I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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