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. 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 Global Bioenergies SA (EPA:ALGBE) does use debt in its business. But should shareholders be worried about its use of debt?
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. 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. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Global Bioenergies Carry?
You can click the graphic below for the historical numbers, but it shows that Global Bioenergies had €8.12m of debt in June 2019, down from €10.2m, one year before. However, its balance sheet shows it holds €20.8m in cash, so it actually has €12.7m net cash.
How Healthy Is Global Bioenergies's Balance Sheet?
We can see from the most recent balance sheet that Global Bioenergies had liabilities of €12.3m falling due within a year, and liabilities of €6.14m due beyond that. Offsetting this, it had €20.8m in cash and €3.06m in receivables that were due within 12 months. So it actually has €5.41m more liquid assets than total liabilities.
It's good to see that Global Bioenergies has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Global Bioenergies 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 it is future earnings, more than anything, that will determine Global Bioenergies'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.
In the last year Global Bioenergies wasn't profitable at an EBIT level, but managed to grow its revenue by 252%, to €747k. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
So How Risky Is Global Bioenergies?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Global Bioenergies lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through €16m of cash and made a loss of €12m. But at least it has €12.7m on the balance sheet to spend on growth, near-term. Importantly, Global Bioenergies's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 5 warning signs for Global Bioenergies (2 shouldn't be ignored!) that you should be aware of before investing here.
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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