Does Global Bioenergies (EPA:ALGBE) Have A Healthy Balance Sheet?

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 note that Global Bioenergies SA (EPA:ALGBE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Global Bioenergies

What Is Global Bioenergies's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Global Bioenergies had €13.4m of debt, an increase on €8.83m, over one year. However, because it has a cash reserve of €12.5m, its net debt is less, at about €922.4k.

A Look At Global Bioenergies' Liabilities

According to the last reported balance sheet, Global Bioenergies had liabilities of €14.4m due within 12 months, and liabilities of €5.64m due beyond 12 months. Offsetting these obligations, it had cash of €12.5m as well as receivables valued at €2.74m due within 12 months. So it has liabilities totalling €4.83m more than its cash and near-term receivables, combined.

Since publicly traded Global Bioenergies shares are worth a total of €64.2m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, Global Bioenergies has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Global Bioenergies's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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

Caveat Emptor

Importantly, Global Bioenergies had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable €14m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through €30m of cash over the last year. So suffice it to say we consider the stock very risky. 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. For example Global Bioenergies has 5 warning signs (and 2 which are a bit unpleasant) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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