Is BluMetric Environmental (CVE:BLM) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies BluMetric Environmental Inc. (CVE:BLM) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for BluMetric Environmental

What Is BluMetric Environmental's Net Debt?

You can click the graphic below for the historical numbers, but it shows that BluMetric Environmental had CA$2.18m of debt in March 2021, down from CA$3.41m, one year before. However, it does have CA$4.21m in cash offsetting this, leading to net cash of CA$2.03m.

How Healthy Is BluMetric Environmental's Balance Sheet?

According to the last reported balance sheet, BluMetric Environmental had liabilities of CA$7.32m due within 12 months, and liabilities of CA$718.0k due beyond 12 months. Offsetting this, it had CA$4.21m in cash and CA$9.21m in receivables that were due within 12 months. So it actually has CA$5.38m more liquid assets than total liabilities.

It's good to see that BluMetric Environmental has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, BluMetric Environmental boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, BluMetric Environmental turned things around in the last 12 months, delivering and EBIT of CA$5.4m. There's no doubt that we learn most about debt from the balance sheet. But it is BluMetric Environmental's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last year, BluMetric Environmental actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case BluMetric Environmental has CA$2.03m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 108% of that EBIT to free cash flow, bringing in CA$5.9m. So is BluMetric Environmental's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for BluMetric Environmental that you should be aware of before investing here.

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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