Is Babylon Pump & Power (ASX:BPP) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Babylon Pump & Power Limited (ASX:BPP) does use debt in its business. 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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Babylon Pump & Power

What Is Babylon Pump & Power's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Babylon Pump & Power had debt of AU$15.6m, up from AU$13.5m in one year. However, because it has a cash reserve of AU$2.24m, its net debt is less, at about AU$13.3m.

How Healthy Is Babylon Pump & Power's Balance Sheet?

The latest balance sheet data shows that Babylon Pump & Power had liabilities of AU$20.3m due within a year, and liabilities of AU$3.69m falling due after that. Offsetting these obligations, it had cash of AU$2.24m as well as receivables valued at AU$4.44m due within 12 months. So its liabilities total AU$17.4m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's AU$14.7m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is Babylon Pump & Power's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Babylon Pump & Power reported revenue of AU$28m, which is a gain of 28%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Babylon Pump & Power still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping AU$3.9m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through AU$1.0m in negative free cash flow over the last year. That means it's on the risky side of things. 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Babylon Pump & Power (of which 4 don't sit too well with us!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.