Is BuildDirect.com Technologies (CVE:BILD) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that BuildDirect.com Technologies Inc. (CVE:BILD) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for BuildDirect.com Technologies

What Is BuildDirect.com Technologies's Net Debt?

The image below, which you can click on for greater detail, shows that BuildDirect.com Technologies had debt of US$9.74m at the end of March 2024, a reduction from US$12.1m over a year. However, because it has a cash reserve of US$2.59m, its net debt is less, at about US$7.15m.

How Healthy Is BuildDirect.com Technologies' Balance Sheet?

According to the last reported balance sheet, BuildDirect.com Technologies had liabilities of US$11.7m due within 12 months, and liabilities of US$8.72m due beyond 12 months. On the other hand, it had cash of US$2.59m and US$3.79m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$14.1m.

Given this deficit is actually higher than the company's market capitalization of US$11.4m, we think shareholders really should watch BuildDirect.com Technologies's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if BuildDirect.com Technologies can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, BuildDirect.com Technologies made a loss at the EBIT level, and saw its revenue drop to US$70m, which is a fall of 18%. We would much prefer see growth.

Caveat Emptor

Not only did BuildDirect.com Technologies's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at US$1.1m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of US$4.0m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. 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. For example, we've discovered 2 warning signs for BuildDirect.com Technologies (1 doesn't sit too well with us!) 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.

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