Is Blockchain Group (EPA:ALTBG) 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.' 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. We note that The Blockchain Group (EPA:ALTBG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Blockchain Group

What Is Blockchain Group's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Blockchain Group had debt of €3.55m, up from €2.81m in one year. However, it does have €2.54m in cash offsetting this, leading to net debt of about €1.01m.

How Healthy Is Blockchain Group's Balance Sheet?

According to the last reported balance sheet, Blockchain Group had liabilities of €21.7m due within 12 months, and liabilities of €898.0k due beyond 12 months. Offsetting this, it had €2.54m in cash and €17.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €2.19m.

Since publicly traded Blockchain Group shares are worth a total of €74.2m, 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, Blockchain Group has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Blockchain Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Blockchain Group wasn't profitable at an EBIT level, but managed to grow its revenue by 199%, to €13m. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

While we can certainly appreciate Blockchain Group's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost €674k 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. So we think its balance sheet is a little strained, though not beyond repair. Surprisingly, we note that it actually reported positive free cash flow of €347k and a profit of €408k. So one might argue that there's still a chance it can get things on the right track. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Blockchain Group has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.