Is BRAIN Biotech (ETR:BNN) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that BRAIN Biotech AG (ETR:BNN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for BRAIN Biotech

What Is BRAIN Biotech's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 BRAIN Biotech had debt of €7.97m, up from none in one year. However, its balance sheet shows it holds €10.2m in cash, so it actually has €2.20m net cash.

How Healthy Is BRAIN Biotech's Balance Sheet?

The latest balance sheet data shows that BRAIN Biotech had liabilities of €14.6m due within a year, and liabilities of €39.1m falling due after that. On the other hand, it had cash of €10.2m and €8.84m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €34.6m.

This is a mountain of leverage relative to its market capitalization of €48.1m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, BRAIN Biotech also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine BRAIN Biotech's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, BRAIN Biotech reported revenue of €56m, which is a gain of 3.8%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is BRAIN Biotech?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that BRAIN Biotech 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 €3.9m and booked a €8.0m accounting loss. However, it has net cash of €2.20m, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For instance, we've identified 1 warning sign for BRAIN Biotech that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com