Is Sirona Biochem (CVE:SBM) Weighed On By Its Debt Load?
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. 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 Sirona Biochem Corp. (CVE:SBM) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Sirona Biochem
How Much Debt Does Sirona Biochem Carry?
You can click the graphic below for the historical numbers, but it shows that Sirona Biochem had CA$1.49m of debt in July 2019, down from CA$3.00m, one year before. However, it does have CA$2.95m in cash offsetting this, leading to net cash of CA$1.45m.
How Healthy Is Sirona Biochem's Balance Sheet?
We can see from the most recent balance sheet that Sirona Biochem had liabilities of CA$864.3k falling due within a year, and liabilities of CA$1.28m due beyond that. Offsetting these obligations, it had cash of CA$2.95m as well as receivables valued at CA$1.34m due within 12 months. So it actually has CA$2.14m more liquid assets than total liabilities.
This short term liquidity is a sign that Sirona Biochem could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Sirona Biochem boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Sirona Biochem 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, Sirona Biochem shareholders no doubt hope it can fund itself until it has a profitable product.
So How Risky Is Sirona Biochem?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Sirona Biochem had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through CA$3.0m of cash and made a loss of CA$3.9m. Given it only has net cash of CA$1.45m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. For riskier companies like Sirona Biochem I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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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