Microbix Biosystems (TSE:MBX) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Microbix Biosystems Inc. (TSE:MBX) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Microbix Biosystems

How Much Debt Does Microbix Biosystems Carry?

As you can see below, Microbix Biosystems had CA$5.25m of debt at March 2022, down from CA$5.87m a year prior. But on the other hand it also has CA$12.2m in cash, leading to a CA$6.95m net cash position.

How Healthy Is Microbix Biosystems' Balance Sheet?

The latest balance sheet data shows that Microbix Biosystems had liabilities of CA$3.57m due within a year, and liabilities of CA$5.57m falling due after that. Offsetting these obligations, it had cash of CA$12.2m as well as receivables valued at CA$4.58m due within 12 months. So it actually has CA$7.65m 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!

Pleasingly, Microbix Biosystems is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 352% gain in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Microbix Biosystems has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last two years, Microbix Biosystems created free cash flow amounting to 14% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Microbix Biosystems has CA$6.95m in net cash and a decent-looking balance sheet. And we liked the look of last year's 352% year-on-year EBIT growth. So we are not troubled with Microbix Biosystems's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Microbix Biosystems (of which 1 is significant!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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