Is Blackline Safety (TSE:BLN) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Blackline Safety Corp. (TSE:BLN) 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 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Blackline Safety

What Is Blackline Safety's Debt?

The image below, which you can click on for greater detail, shows that at July 2023 Blackline Safety had debt of CA$17.5m, up from none in one year. But on the other hand it also has CA$17.6m in cash, leading to a CA$92.0k net cash position.

A Look At Blackline Safety's Liabilities

According to the last reported balance sheet, Blackline Safety had liabilities of CA$40.1m due within 12 months, and liabilities of CA$28.7m due beyond 12 months. On the other hand, it had cash of CA$17.6m and CA$35.0m worth of receivables due within a year. So its liabilities total CA$16.1m more than the combination of its cash and short-term receivables.

Given Blackline Safety has a market capitalization of CA$280.6m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Blackline Safety boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Blackline Safety can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Blackline Safety reported revenue of CA$92m, which is a gain of 31%, 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.

So How Risky Is Blackline Safety?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Blackline Safety lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$42m of cash and made a loss of CA$31m. But at least it has CA$92.0k on the balance sheet to spend on growth, near-term. Blackline Safety'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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Blackline Safety (including 1 which can't be ignored) .

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.