Is BioRem (CVE:BRM) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that BioRem Inc. (CVE:BRM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 BioRem

What Is BioRem's Net Debt?

As you can see below, BioRem had CA$2.57m of debt at September 2024, down from CA$3.11m a year prior. But it also has CA$7.27m in cash to offset that, meaning it has CA$4.71m net cash.

A Look At BioRem's Liabilities

We can see from the most recent balance sheet that BioRem had liabilities of CA$11.4m falling due within a year, and liabilities of CA$3.00m due beyond that. Offsetting these obligations, it had cash of CA$7.27m as well as receivables valued at CA$9.86m due within 12 months. So it can boast CA$2.71m more liquid assets than total liabilities.

This short term liquidity is a sign that BioRem could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that BioRem has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, BioRem grew its EBIT by 389% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is BioRem'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. BioRem 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 most recent three years, BioRem recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that BioRem has net cash of CA$4.71m, as well as more liquid assets than liabilities. And we liked the look of last year's 389% year-on-year EBIT growth. So is BioRem'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 - BioRem has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.