Would Baylin Technologies (TSE:BYL) Be Better Off With Less 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. We can see that Baylin Technologies Inc. (TSE:BYL) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Baylin Technologies

What Is Baylin Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that Baylin Technologies had CA$46.5m of debt in December 2020, down from CA$49.2m, one year before. However, it also had CA$11.2m in cash, and so its net debt is CA$35.3m.

How Strong Is Baylin Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Baylin Technologies had liabilities of CA$36.5m due within 12 months and liabilities of CA$48.1m due beyond that. Offsetting these obligations, it had cash of CA$11.2m as well as receivables valued at CA$21.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$51.9m.

This deficit is considerable relative to its market capitalization of CA$64.6m, so it does suggest shareholders should keep an eye on Baylin Technologies' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe 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 Baylin Technologies can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Baylin Technologies made a loss at the EBIT level, and saw its revenue drop to CA$120m, which is a fall of 22%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Baylin Technologies's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CA$9.1m at the EBIT level. 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. However, it doesn't help that it burned through CA$3.5m of cash over the last year. So suffice it to say we consider the stock very risky. 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 Baylin Technologies you should be aware of, and 1 of them can't be ignored.

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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