We Think BuildDirect.com Technologies (CVE:BILD) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, BuildDirect.com Technologies Inc. (CVE:BILD) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for BuildDirect.com Technologies

What Is BuildDirect.com Technologies's Net Debt?

The chart below, which you can click on for greater detail, shows that BuildDirect.com Technologies had US$10.4m in debt in September 2024; about the same as the year before. On the flip side, it has US$3.08m in cash leading to net debt of about US$7.32m.

How Strong Is BuildDirect.com Technologies' Balance Sheet?

We can see from the most recent balance sheet that BuildDirect.com Technologies had liabilities of US$14.4m falling due within a year, and liabilities of US$8.55m due beyond that. On the other hand, it had cash of US$3.08m and US$4.21m worth of receivables due within a year. So its liabilities total US$15.6m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of US$20.6m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is BuildDirect.com Technologies's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year BuildDirect.com Technologies had a loss before interest and tax, and actually shrunk its revenue by 15%, to US$66m. We would much prefer see growth.

Caveat Emptor

While BuildDirect.com Technologies's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at US$1.3m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of US$3.5m into a profit. In the meantime, we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for BuildDirect.com Technologies (1 shouldn't be ignored) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.