Is BBS-Bioactive Bone Substitutes Oyj (HEL:BONEH) Using Too Much 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 BBS-Bioactive Bone Substitutes Oyj (HEL:BONEH) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for BBS-Bioactive Bone Substitutes Oyj

How Much Debt Does BBS-Bioactive Bone Substitutes Oyj Carry?

The image below, which you can click on for greater detail, shows that BBS-Bioactive Bone Substitutes Oyj had debt of €6.01m at the end of December 2020, a reduction from €6.33m over a year. However, it also had €3.44m in cash, and so its net debt is €2.57m.

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

Zooming in on the latest balance sheet data, we can see that BBS-Bioactive Bone Substitutes Oyj had liabilities of €723.9k due within 12 months and liabilities of €5.88m due beyond that. Offsetting these obligations, it had cash of €3.44m as well as receivables valued at €210.4k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €2.96m.

Of course, BBS-Bioactive Bone Substitutes Oyj has a market capitalization of €23.5m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

Since BBS-Bioactive Bone Substitutes Oyj doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.

Caveat Emptor

Importantly, BBS-Bioactive Bone Substitutes Oyj had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable €2.6m 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. Another cause for caution is that is bled €2.5m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with BBS-Bioactive Bone Substitutes Oyj (at least 2 which make us uncomfortable) , and understanding them should be part of your investment process.

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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