Is Baylin Technologies (TSE:BYL) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Baylin Technologies Inc. (TSE:BYL) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Baylin Technologies

What Is Baylin Technologies's Debt?

As you can see below, Baylin Technologies had CA$34.8m of debt at March 2022, down from CA$50.7m a year prior. On the flip side, it has CA$12.7m in cash leading to net debt of about CA$22.0m.

How Healthy Is Baylin Technologies' Balance Sheet?

According to the last reported balance sheet, Baylin Technologies had liabilities of CA$63.2m due within 12 months, and liabilities of CA$17.9m due beyond 12 months. Offsetting this, it had CA$12.7m in cash and CA$23.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$45.3m.

When you consider that this deficiency exceeds the company's CA$36.1m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Baylin 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, Baylin Technologies made a loss at the EBIT level, and saw its revenue drop to CA$110m, which is a fall of 5.4%. That's not what we would hope to see.

Caveat Emptor

Importantly, Baylin Technologies had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CA$26m at the EBIT level. 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. Not least because it burned through CA$9.6m in negative free cash flow over the last year. So suffice it to say we consider the stock to be 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 example Baylin Technologies has 5 warning signs (and 2 which shouldn't be ignored) we think you should know about.

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.