Is Carbios SAS (EPA:ALCRB) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Carbios SAS (EPA:ALCRB) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Carbios SAS

What Is Carbios SAS's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Carbios SAS had debt of €41.8m, up from €38.3m in one year. However, its balance sheet shows it holds €120.7m in cash, so it actually has €78.9m net cash.

How Healthy Is Carbios SAS' Balance Sheet?

We can see from the most recent balance sheet that Carbios SAS had liabilities of €19.8m falling due within a year, and liabilities of €44.9m due beyond that. On the other hand, it had cash of €120.7m and €6.23m worth of receivables due within a year. So it actually has €62.2m more liquid assets than total liabilities.

This surplus strongly suggests that Carbios SAS has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Carbios SAS has more cash than debt is arguably a good indication that 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 Carbios SAS'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.

It seems likely shareholders hope that Carbios SAS can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

So How Risky Is Carbios SAS?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Carbios SAS had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through €69m of cash and made a loss of €32m. But at least it has €78.9m on the balance sheet to spend on growth, near-term. 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. Be aware that Carbios SAS is showing 4 warning signs in our investment analysis , and 3 of those shouldn't be ignored...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.