Is BluMetric Environmental (CVE:BLM) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that BluMetric Environmental Inc. (CVE:BLM) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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?

You can click the graphic below for the historical numbers, but it shows that BluMetric Environmental had CA$2.58m of debt in December 2020, down from CA$3.75m, one year before. However, its balance sheet shows it holds CA$2.66m in cash, so it actually has CA$75.6k 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$6.94m falling due within a year, and liabilities of CA$825.2k due beyond that. Offsetting these obligations, it had cash of CA$2.66m as well as receivables valued at CA$9.10m due within 12 months. So it actually has CA$4.00m more liquid assets than total liabilities.

This surplus strongly suggests that BluMetric Environmental has a rock-solid balance sheet (and the debt is of no concern whatsoever). 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 282% 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 69% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case BluMetric Environmental has CA$75.6k in net cash and a decent-looking balance sheet. And we liked the look of last year's 282% year-on-year EBIT growth. So we don't think BluMetric Environmental's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for BluMetric Environmental that you should be aware of.

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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