Health Check: How Prudently Does Braster (WSE:BRA) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Braster S.A. (WSE:BRA) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Our analysis indicates that BRA is potentially overvalued!

What Is Braster's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Braster had debt of zł12.7m, up from zł12.0m in one year. And it doesn't have much cash, so its net debt is about the same.

How Strong Is Braster's Balance Sheet?

According to the last reported balance sheet, Braster had liabilities of zł17.9m due within 12 months, and liabilities of zł4.19m due beyond 12 months. Offsetting this, it had zł150.0k in cash and zł767.0k in receivables that were due within 12 months. So its liabilities total zł21.2m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of zł23.8m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Braster's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Given its lack of meaningful operating revenue, Braster shareholders no doubt hope it can fund itself until it can sell some of its new medical technology.

Caveat Emptor

Importantly, Braster had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping zł2.8m. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled zł2.8m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Braster is showing 4 warning signs in our investment analysis , and 3 of those shouldn't be ignored...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.