Is Blumar (SNSE:BLUMAR) Using Debt Sensibly?

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. We note that Blumar S.A. (SNSE:BLUMAR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Blumar

What Is Blumar's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Blumar had debt of US$320.2m, up from US$270.3m in one year. However, it does have US$43.8m in cash offsetting this, leading to net debt of about US$276.3m.

How Strong Is Blumar's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Blumar had liabilities of US$270.6m due within 12 months and liabilities of US$256.8m due beyond that. Offsetting this, it had US$43.8m in cash and US$77.8m in receivables that were due within 12 months. So its liabilities total US$405.8m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of US$320.3m, we think shareholders really should watch Blumar'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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Blumar'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.

Over 12 months, Blumar reported revenue of US$448m, which is a gain of 5.4%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Blumar had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$48m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of US$26m over the last twelve months. So suffice it to say 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. Take risks, for example - Blumar has 2 warning signs we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. 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.
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