Is Bumech (WSE:BMC) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Bumech S.A. (WSE:BMC) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Bumech

What Is Bumech's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Bumech had debt of zł5.61m, up from zł3.62m in one year. However, it also had zł401.0k in cash, and so its net debt is zł5.21m.

How Strong Is Bumech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bumech had liabilities of zł35.0m due within 12 months and liabilities of zł41.4m due beyond that. Offsetting these obligations, it had cash of zł401.0k as well as receivables valued at zł22.1m due within 12 months. So it has liabilities totalling zł53.9m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the zł29.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Bumech would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Bumech'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.

In the last year Bumech wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to zł77m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Bumech's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost zł2.8m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of zł11m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Bumech (of which 2 are concerning!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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