Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Banka BioLoo Limited (NSE:BANKA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Banka BioLoo
What Is Banka BioLoo's Debt?
The image below, which you can click on for greater detail, shows that Banka BioLoo had debt of ₹21.5m at the end of March 2019, a reduction from ₹27.3m over a year. But it also has ₹37.2m in cash to offset that, meaning it has ₹15.7m net cash.
A Look At Banka BioLoo's Liabilities
According to the last reported balance sheet, Banka BioLoo had liabilities of ₹53.9m due within 12 months, and liabilities of ₹10.4m due beyond 12 months. On the other hand, it had cash of ₹37.2m and ₹106.4m worth of receivables due within a year. So it can boast ₹79.2m more liquid assets than total liabilities.
This surplus suggests that Banka BioLoo is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Banka BioLoo boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Banka BioLoo has boosted its EBIT by 86%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is Banka BioLoo's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Banka BioLoo may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Banka BioLoo saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.