Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Biofrontera AG (ETR:B8F) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Biofrontera's Debt?
You can click the graphic below for the historical numbers, but it shows that Biofrontera had €20.3m of debt in March 2021, down from €23.1m, one year before. But on the other hand it also has €38.1m in cash, leading to a €17.8m net cash position.
How Healthy Is Biofrontera's Balance Sheet?
We can see from the most recent balance sheet that Biofrontera had liabilities of €11.4m falling due within a year, and liabilities of €40.0m due beyond that. On the other hand, it had cash of €38.1m and €2.48m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €10.9m.
Of course, Biofrontera has a market capitalization of €171.9m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Biofrontera 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 ultimately the future profitability of the business will decide if Biofrontera 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.
In the last year Biofrontera had a loss before interest and tax, and actually shrunk its revenue by 5.1%, to €29m. We would much prefer see growth.
So How Risky Is Biofrontera?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Biofrontera had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through €3.6m of cash and made a loss of €12m. Given it only has net cash of €17.8m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For example, we've discovered 1 warning sign for Biofrontera that you should be aware of before investing here.
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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