Carbios SAS (EPA:ALCRB) Has Debt But No Earnings; Should You Worry?

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.' 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 Carbios SAS (EPA:ALCRB) does use debt in its business. 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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Carbios SAS

How Much Debt Does Carbios SAS Carry?

The image below, which you can click on for greater detail, shows that at December 2022 Carbios SAS had debt of €38.2m, up from €13.3m in one year. However, its balance sheet shows it holds €100.6m in cash, so it actually has €62.4m net cash.

How Strong Is Carbios SAS' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Carbios SAS had liabilities of €15.6m due within 12 months and liabilities of €43.0m due beyond that. Offsetting this, it had €100.6m in cash and €6.81m in receivables that were due within 12 months. So it actually has €48.8m more liquid assets than total liabilities.

This surplus suggests that Carbios SAS has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Carbios SAS has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Carbios SAS's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Given it has no significant operating revenue at the moment, shareholders will be hoping Carbios SAS can make progress and gain better traction for the business, before it runs low on cash.

So How Risky Is Carbios SAS?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Carbios SAS lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of €34m and booked a €28m accounting loss. But the saving grace is the €62.4m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Carbios SAS (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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.