The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Baylin Technologies Inc. (TSE:BYL) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Baylin Technologies Carry?
As you can see below, at the end of June 2019, Baylin Technologies had CA$59.9m of debt, up from CA$31.5m a year ago. Click the image for more detail. However, because it has a cash reserve of CA$17.2m, its net debt is less, at about CA$42.7m.
How Healthy Is Baylin Technologies's Balance Sheet?
The latest balance sheet data shows that Baylin Technologies had liabilities of CA$53.6m due within a year, and liabilities of CA$51.5m falling due after that. Offsetting these obligations, it had cash of CA$17.2m as well as receivables valued at CA$35.5m due within 12 months. So it has liabilities totalling CA$52.4m more than its cash and near-term receivables, combined.
Baylin Technologies has a market capitalization of CA$138.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Baylin Technologies's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Baylin Technologies reported revenue of CA$161m, which is a gain of 42%. With any luck the company will be able to grow its way to profitability.
While we can certainly savour Baylin Technologies'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 CA$964k. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$4.9m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. For riskier companies like Baylin Technologies 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.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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