Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Biocure Technology Inc. (CNSX:CURE) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is Biocure Technology's Debt?
As you can see below, at the end of March 2019, Biocure Technology had CA$1.69m of debt, up from CA$493.0k a year ago. Click the image for more detail. On the flip side, it has CA$167.2k in cash leading to net debt of about CA$1.53m.
How Healthy Is Biocure Technology's Balance Sheet?
According to the last reported balance sheet, Biocure Technology had liabilities of CA$1.42m due within 12 months, and liabilities of CA$789.0k due beyond 12 months. Offsetting this, it had CA$167.2k in cash and CA$39.5k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$2.00m.
Given Biocure Technology has a market capitalization of CA$29.1m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Biocure Technology 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.
Given its lack of meaningful operating revenue, Biocure Technology shareholders no doubt hope it can fund itself until it has a profitable product.
Over the last twelve months Biocure Technology produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$5.9m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$2.6m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Biocure Technology insider transactions.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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