Is Microbix Biosystems (TSE:MBX) Using Debt Sensibly?

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.' 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, 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 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Debt?

As you can see below, at the end of June 2023, Microbix Biosystems had CA$5.67m of debt, up from CA$4.79m a year ago. Click the image for more detail. But it also has CA$13.4m in cash to offset that, meaning it has CA$7.74m 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$5.35m due within 12 months and liabilities of CA$6.30m due beyond that. On the other hand, it had cash of CA$13.4m and CA$3.40m worth of receivables due within a year. So it can boast CA$5.16m 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! 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$17m, which is a fall of 19%. That's not what we would hope to see.

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$1.6m of cash and made a loss of CA$2.5m. Given it only has net cash of CA$7.74m, the company may need to raise more capital if it doesn't reach break-even 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. 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. We've identified 1 warning sign with Microbix Biosystems , and understanding them should be part of your investment process.

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.