Benchmark Botanics (CSE:BBT) Is Making Moderate Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Benchmark Botanics Inc. (CSE:BBT) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Benchmark Botanics

What Is Benchmark Botanics's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Benchmark Botanics had debt of CA$3.68m, up from none in one year. However, because it has a cash reserve of CA$360.2k, its net debt is less, at about CA$3.32m.

How Healthy Is Benchmark Botanics's Balance Sheet?

We can see from the most recent balance sheet that Benchmark Botanics had liabilities of CA$6.25m falling due within a year, and liabilities of CA$1.15m due beyond that. Offsetting this, it had CA$360.2k in cash and CA$423.9k in receivables that were due within 12 months. So its liabilities total CA$6.62m more than the combination of its cash and short-term receivables.

Benchmark Botanics has a market capitalization of CA$15.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Benchmark Botanics 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.

In the last year Benchmark Botanics wasn't profitable at an EBIT level, but managed to grow its revenue by 372%, to CA$641k. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Over the last twelve months Benchmark Botanics produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$4.7m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$5.0m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Case in point: We've spotted 6 warning signs for Benchmark Botanics you should be aware of, and 3 of them make us uncomfortable.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

When trading Benchmark Botanics or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.