BluMetric Environmental (CVE:BLM) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, BluMetric Environmental Inc. (CVE:BLM) does carry debt. But the more important question is: how much risk is that debt creating?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for BluMetric Environmental

What Is BluMetric Environmental's Debt?

As you can see below, BluMetric Environmental had CA$2.15m of debt at June 2021, down from CA$2.73m a year prior. However, its balance sheet shows it holds CA$3.79m in cash, so it actually has CA$1.63m net cash.

How Healthy Is BluMetric Environmental's Balance Sheet?

We can see from the most recent balance sheet that BluMetric Environmental had liabilities of CA$5.72m falling due within a year, and liabilities of CA$2.04m due beyond that. Offsetting this, it had CA$3.79m in cash and CA$10.5m in receivables that were due within 12 months. So it can boast CA$6.48m more liquid assets than total liabilities.

This surplus liquidity suggests that BluMetric Environmental's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, BluMetric Environmental boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that BluMetric Environmental grew its EBIT by 717% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since BluMetric Environmental 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. BluMetric Environmental may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, BluMetric Environmental produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that BluMetric Environmental has net cash of CA$1.63m, as well as more liquid assets than liabilities. And we liked the look of last year's 717% year-on-year EBIT growth. The bottom line is that we do not find BluMetric Environmental's debt levels at all concerning. 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. For example - BluMetric Environmental has 3 warning signs we think you should be aware of.

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.