Biomm (BVMF:BIOM3) Is Carrying A Fair Bit Of Debt

Published
June 29, 2022
BOVESPA:BIOM3
Source: Shutterstock

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that Biomm S.A. (BVMF:BIOM3) does have debt on its balance sheet. 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. 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. 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 Biomm

What Is Biomm's Debt?

As you can see below, Biomm had R$174.3m of debt at March 2022, down from R$186.4m a year prior. On the flip side, it has R$73.6m in cash leading to net debt of about R$100.7m.

debt-equity-history-analysis
BOVESPA:BIOM3 Debt to Equity History June 29th 2022

How Strong Is Biomm's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Biomm had liabilities of R$50.2m due within 12 months and liabilities of R$185.6m due beyond that. On the other hand, it had cash of R$73.6m and R$29.0m worth of receivables due within a year. So its liabilities total R$133.1m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Biomm is worth R$560.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Biomm will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Biomm reported revenue of R$119m, which is a gain of 89%, 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, Biomm still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable R$72m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through R$91m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Biomm has 4 warning signs (and 2 which don't sit too well with us) we think 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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