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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Bioalpha Holdings Berhad (KLSE:BIOHLDG) makes use of debt. But the real question is whether this debt is making the company risky.
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Bioalpha Holdings Berhad Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Bioalpha Holdings Berhad had RM6.25m of debt, an increase on RM5.47m, over one year. But on the other hand it also has RM27.6m in cash, leading to a RM21.4m net cash position.
How Strong Is Bioalpha Holdings Berhad's Balance Sheet?
We can see from the most recent balance sheet that Bioalpha Holdings Berhad had liabilities of RM10.1m falling due within a year, and liabilities of RM17.4m due beyond that. On the other hand, it had cash of RM27.6m and RM39.1m worth of receivables due within a year. So it can boast RM39.2m more liquid assets than total liabilities.
This short term liquidity is a sign that Bioalpha Holdings Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Bioalpha Holdings Berhad 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 Bioalpha Holdings Berhad'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.
In the last year Bioalpha Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 43%, to RM37m. To be frank that doesn't bode well.
So How Risky Is Bioalpha Holdings Berhad?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Bioalpha Holdings Berhad lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through RM20m of cash and made a loss of RM38m. Given it only has net cash of RM21.4m, the company may need to raise more capital if it doesn't reach break-even soon. 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. To that end, you should be aware of the 3 warning signs we've spotted with Bioalpha Holdings Berhad .
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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