Health Check: How Prudently Does Bubs Australia (ASX:BUB) Use Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Bubs Australia Limited (ASX:BUB) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Bubs Australia

How Much Debt Does Bubs Australia Carry?

The chart below, which you can click on for greater detail, shows that Bubs Australia had AU$2.00m in debt in December 2020; about the same as the year before. However, it does have AU$40.2m in cash offsetting this, leading to net cash of AU$38.2m.

How Healthy Is Bubs Australia's Balance Sheet?

According to the last reported balance sheet, Bubs Australia had liabilities of AU$18.2m due within 12 months, and liabilities of AU$6.60m due beyond 12 months. On the other hand, it had cash of AU$40.2m and AU$5.45m worth of receivables due within a year. So it can boast AU$20.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Bubs Australia could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Bubs Australia has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Bubs Australia can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Bubs Australia had a loss before interest and tax, and actually shrunk its revenue by 11%, to AU$46m. That's not what we would hope to see.

So How Risky Is Bubs Australia?

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 Bubs Australia lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$22m of cash and made a loss of AU$13m. But at least it has AU$38.2m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Bubs Australia you should be aware of.

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.

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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. 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.
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