Is Bitfarms (TSE:BITF) A Risky Investment?

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, Bitfarms Ltd. (TSE:BITF) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Bitfarms

What Is Bitfarms's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Bitfarms had US$21.1m of debt in March 2023, down from US$138.5m, one year before. But it also has US$29.4m in cash to offset that, meaning it has US$8.29m net cash.

A Look At Bitfarms' Liabilities

The latest balance sheet data shows that Bitfarms had liabilities of US$43.5m due within a year, and liabilities of US$15.8m falling due after that. Offsetting these obligations, it had cash of US$29.4m as well as receivables valued at US$16.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$13.8m.

Of course, Bitfarms has a market capitalization of US$296.6m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Bitfarms boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Bitfarms'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.

In the last year Bitfarms had a loss before interest and tax, and actually shrunk its revenue by 27%, to US$132m. That makes us nervous, to say the least.

So How Risky Is Bitfarms?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Bitfarms had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$58m and booked a US$246m accounting loss. With only US$8.29m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Bitfarms you should be aware of.

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.