Is Global Bioenergies (EPA:ALGBE) Using Debt Sensibly?

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.' 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. As with many other companies Global Bioenergies SA (EPA:ALGBE) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Global Bioenergies

What Is Global Bioenergies's Net Debt?

As you can see below, Global Bioenergies had €6.38m of debt at December 2022, down from €7.35m a year prior. However, it does have €8.94m in cash offsetting this, leading to net cash of €2.56m.

How Healthy Is Global Bioenergies' Balance Sheet?

According to the last reported balance sheet, Global Bioenergies had liabilities of €7.82m due within 12 months, and liabilities of €6.10m due beyond 12 months. Offsetting this, it had €8.94m in cash and €2.22m in receivables that were due within 12 months. So it has liabilities totalling €2.77m more than its cash and near-term receivables, combined.

Given Global Bioenergies has a market capitalization of €56.8m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Global Bioenergies boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Global Bioenergies can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Global Bioenergies made a loss at the EBIT level, and saw its revenue drop to €579k, which is a fall of 30%. To be frank that doesn't bode well.

So How Risky Is Global Bioenergies?

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 Global Bioenergies lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of €12m and booked a €12m accounting loss. Given it only has net cash of €2.56m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For instance, we've identified 6 warning signs for Global Bioenergies (3 make us uncomfortable) you should be aware of.

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.