BBS-Bioactive Bone Substitutes Oyj (HEL:BONEH) Is Making Moderate Use Of Debt

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.' 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. As with many other companies BBS-Bioactive Bone Substitutes Oyj (HEL:BONEH) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for BBS-Bioactive Bone Substitutes Oyj

What Is BBS-Bioactive Bone Substitutes Oyj's Net Debt?

The chart below, which you can click on for greater detail, shows that BBS-Bioactive Bone Substitutes Oyj had €5.98m in debt in June 2021; about the same as the year before. However, because it has a cash reserve of €1.93m, its net debt is less, at about €4.05m.

How Healthy Is BBS-Bioactive Bone Substitutes Oyj's Balance Sheet?

According to the last reported balance sheet, BBS-Bioactive Bone Substitutes Oyj had liabilities of €1.43m due within 12 months, and liabilities of €5.09m due beyond 12 months. Offsetting this, it had €1.93m in cash and €330.3k in receivables that were due within 12 months. So it has liabilities totalling €4.26m more than its cash and near-term receivables, combined.

BBS-Bioactive Bone Substitutes Oyj has a market capitalization of €12.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since BBS-Bioactive Bone Substitutes Oyj will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Given its lack of meaningful operating revenue, BBS-Bioactive Bone Substitutes Oyj shareholders no doubt hope it can fund itself until it has a profitable product.

Caveat Emptor

Over the last twelve months BBS-Bioactive Bone Substitutes Oyj produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable €2.5m 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €3.0m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that BBS-Bioactive Bone Substitutes Oyj is showing 5 warning signs in our investment analysis , and 3 of those are concerning...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.
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