Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that BIOLASE, Inc. (NASDAQ:BIOL) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does BIOLASE Carry?
You can click the graphic below for the historical numbers, but it shows that BIOLASE had US$13.5m of debt in September 2021, down from US$16.1m, one year before. But on the other hand it also has US$33.4m in cash, leading to a US$19.9m net cash position.
How Strong Is BIOLASE's Balance Sheet?
According to the last reported balance sheet, BIOLASE had liabilities of US$13.5m due within 12 months, and liabilities of US$14.7m due beyond 12 months. On the other hand, it had cash of US$33.4m and US$3.64m worth of receivables due within a year. So it can boast US$8.83m more liquid assets than total liabilities.
This short term liquidity is a sign that BIOLASE could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, BIOLASE 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 BIOLASE 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.
Over 12 months, BIOLASE reported revenue of US$35m, which is a gain of 44%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is BIOLASE?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year BIOLASE had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$15m and booked a US$18m accounting loss. Given it only has net cash of US$19.9m, the company may need to raise more capital if it doesn't reach break-even soon. BIOLASE's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - BIOLASE has 4 warning signs we think you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.