Is Microbix Biosystems (TSE:MBX) A Risky Investment?

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.' 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 note that Microbix Biosystems Inc. (TSE:MBX) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Microbix Biosystems

What Is Microbix Biosystems's Net Debt?

As you can see below, at the end of June 2021, Microbix Biosystems had CA$5.91m of debt, up from CA$5.55m a year ago. Click the image for more detail. However, its balance sheet shows it holds CA$7.51m in cash, so it actually has CA$1.59m net cash.

How Strong Is Microbix Biosystems' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Microbix Biosystems had liabilities of CA$4.18m due within 12 months and liabilities of CA$4.97m due beyond that. Offsetting these obligations, it had cash of CA$7.51m as well as receivables valued at CA$4.18m due within 12 months. So it actually has CA$2.54m more liquid assets than total liabilities.

This short term liquidity is a sign that Microbix Biosystems could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Microbix Biosystems boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Microbix Biosystems made a loss at the EBIT level, last year, but improved that to positive EBIT of CA$3.2m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Microbix Biosystems can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Microbix Biosystems 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 year, Microbix Biosystems burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Microbix Biosystems has CA$1.59m in net cash and a decent-looking balance sheet. So while Microbix Biosystems does not have a great balance sheet, it's certainly not too bad. 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 - Microbix Biosystems has 3 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.

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.

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