We Think Microbix Biosystems (TSE:MBX) Can Manage Its Debt With Ease

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. We note that Microbix Biosystems Inc. (TSE:MBX) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

We've discovered 3 warning signs about Microbix Biosystems. View them for free.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Microbix Biosystems's Net Debt?

As you can see below, Microbix Biosystems had CA$5.78m of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CA$13.0m in cash offsetting this, leading to net cash of CA$7.27m.

A Look At Microbix Biosystems' Liabilities

Zooming in on the latest balance sheet data, we can see that Microbix Biosystems had liabilities of CA$3.88m due within 12 months and liabilities of CA$6.52m due beyond that. Offsetting this, it had CA$13.0m in cash and CA$4.95m in receivables that were due within 12 months. So it actually has CA$7.60m 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!

View our latest analysis for Microbix Biosystems

Better yet, Microbix Biosystems grew its EBIT by 123% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. 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'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 three years, Microbix Biosystems produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Microbix Biosystems has CA$7.27m in net cash and a decent-looking balance sheet. And we liked the look of last year's 123% year-on-year EBIT growth. So we don't think Microbix Biosystems's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. 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 you should know about.

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.

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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.