Microbix Biosystems (TSE:MBX) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Microbix Biosystems Inc. (TSE:MBX) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Microbix Biosystems

How Much Debt Does Microbix Biosystems Carry?

As you can see below, at the end of September 2021, Microbix Biosystems had CA$6.54m of debt, up from CA$5.63m a year ago. Click the image for more detail. However, it does have CA$9.99m in cash offsetting this, leading to net cash of CA$3.45m.

How Strong Is Microbix Biosystems' Balance Sheet?

The latest balance sheet data shows that Microbix Biosystems had liabilities of CA$5.19m due within a year, and liabilities of CA$5.08m falling due after that. Offsetting these obligations, it had cash of CA$9.99m as well as receivables valued at CA$4.21m due within 12 months. So it actually has CA$3.92m 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$4.8m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Microbix Biosystems can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. In the last year, Microbix Biosystems created free cash flow amounting to 17% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Microbix Biosystems has CA$3.45m in net cash and a decent-looking balance sheet. So we don't have any problem with Microbix Biosystems's use of debt. 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 4 warning signs with Microbix Biosystems , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.