We Think Biomm (BVMF:BIOM3) Has A Fair Chunk Of Debt

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 Biomm S.A. (BVMF:BIOM3) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Biomm

What Is Biomm's Debt?

The image below, which you can click on for greater detail, shows that Biomm had debt of R$165.6m at the end of March 2023, a reduction from R$174.3m over a year. However, because it has a cash reserve of R$66.6m, its net debt is less, at about R$99.0m.

A Look At Biomm's Liabilities

We can see from the most recent balance sheet that Biomm had liabilities of R$59.2m falling due within a year, and liabilities of R$175.6m due beyond that. On the other hand, it had cash of R$66.6m and R$37.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$130.6m.

This deficit isn't so bad because Biomm is worth R$526.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Biomm'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.

Over 12 months, Biomm made a loss at the EBIT level, and saw its revenue drop to R$114m, which is a fall of 4.5%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Biomm produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping R$80m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$85m 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Biomm (of which 2 make us uncomfortable!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.