Is Microbix Biosystems (TSE:MBX) Using Debt In A Risky Way?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Microbix Biosystems Inc. (TSE:MBX) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Microbix Biosystems

What Is Microbix Biosystems's Net Debt?

As you can see below, at the end of March 2023, Microbix Biosystems had CA$5.61m of debt, up from CA$5.25m a year ago. Click the image for more detail. However, its balance sheet shows it holds CA$11.7m in cash, so it actually has CA$6.11m net cash.

How Healthy Is Microbix Biosystems' Balance Sheet?

We can see from the most recent balance sheet that Microbix Biosystems had liabilities of CA$3.55m falling due within a year, and liabilities of CA$6.28m due beyond that. Offsetting this, it had CA$11.7m in cash and CA$3.18m in receivables that were due within 12 months. So it actually has CA$5.08m more liquid assets than total liabilities.

This surplus suggests that Microbix Biosystems has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Microbix Biosystems boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Microbix Biosystems's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Microbix Biosystems made a loss at the EBIT level, and saw its revenue drop to CA$16m, which is a fall of 23%. To be frank that doesn't bode well.

So How Risky Is Microbix Biosystems?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Microbix Biosystems lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$1.1m of cash and made a loss of CA$1.1m. With only CA$6.11m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Microbix Biosystems that you should be aware of before investing here.

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.

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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.