Is Bubs Australia (ASX:BUB) Weighed On By Its Debt Load?

Warren Buffett famously said, '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. As with many other companies Bubs Australia Limited (ASX:BUB) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, 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.

Check out our latest analysis for Bubs Australia

What Is Bubs Australia's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Bubs Australia had AU$5.28m of debt, an increase on AU$2.00m, over one year. However, it does have AU$17.5m in cash offsetting this, leading to net cash of AU$12.2m.

How Healthy Is Bubs Australia's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bubs Australia had liabilities of AU$28.5m due within 12 months and liabilities of AU$1.35m due beyond that. Offsetting these obligations, it had cash of AU$17.5m as well as receivables valued at AU$9.32m due within 12 months. So its liabilities total AU$3.04m more than the combination of its cash and short-term receivables.

Of course, Bubs Australia has a market capitalization of AU$93.8m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Bubs Australia boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 33%, to AU$80m. Shareholders probably have their fingers crossed that it can grow its way to profits.

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 we do note that Bubs Australia had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$27m and booked a AU$21m accounting loss. With only AU$12.2m on the balance sheet, it would appear that its going to need to raise capital again soon. Bubs Australia's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. 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 3 warning signs for Bubs Australia you should know about.

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. 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.