Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Bone Therapeutics SA (EBR:BOTHE) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Bone Therapeutics's Debt?
As you can see below, at the end of June 2019, Bone Therapeutics had €15.6m of debt, up from €13.4m a year ago. Click the image for more detail. On the flip side, it has €13.2m in cash leading to net debt of about €2.42m.
How Healthy Is Bone Therapeutics's Balance Sheet?
We can see from the most recent balance sheet that Bone Therapeutics had liabilities of €9.23m falling due within a year, and liabilities of €12.8m due beyond that. Offsetting this, it had €13.2m in cash and €4.03m in receivables that were due within 12 months. So it has liabilities totalling €4.79m more than its cash and near-term receivables, combined.
Of course, Bone Therapeutics has a market capitalization of €39.0m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 Bone Therapeutics 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.
In the last year Bone Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by50%, to €2.4m. With any luck the company will be able to grow its way to profitability.
Despite the top line growth, Bone Therapeutics still had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost a very considerable €13m at the EBIT level. 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. However, it doesn't help that it burned through €11m of cash over the last year. So in short it's a really risky stock. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Bone Therapeutics's profit, revenue, and operating cashflow have changed over the last few years.
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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