Does Biome Grow (CSE:BIO) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Biome Grow Inc. (CSE:BIO) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Biome Grow

What Is Biome Grow's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Biome Grow had CA$3.80m of debt, an increase on CA$1.25m, over one year. However, it does have CA$8.83m in cash offsetting this, leading to net cash of CA$5.03m.

How Strong Is Biome Grow's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Biome Grow had liabilities of CA$5.71m due within 12 months and liabilities of CA$2.59m due beyond that. Offsetting this, it had CA$8.83m in cash and CA$494.7k in receivables that were due within 12 months. So it can boast CA$1.02m more liquid assets than total liabilities.

It's good to see that Biome Grow 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, Biome Grow boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Biome Grow 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 Biome Grow managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

So How Risky Is Biome Grow?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Biome Grow had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CA$1.8m and booked a CA$10m accounting loss. Given it only has net cash of CA$5.03m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, Biome Grow's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Biome Grow you should be aware of, and 2 of them make us uncomfortable.

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. 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.
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