Is Bitcoin Depot (NASDAQ:BTM) A Risky Investment?

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. Importantly, Bitcoin Depot Inc. (NASDAQ:BTM) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Bitcoin Depot

How Much Debt Does Bitcoin Depot Carry?

The image below, which you can click on for greater detail, shows that Bitcoin Depot had debt of US$18.7m at the end of September 2023, a reduction from US$37.4m over a year. But it also has US$29.7m in cash to offset that, meaning it has US$11.0m net cash.

How Strong Is Bitcoin Depot's Balance Sheet?

The latest balance sheet data shows that Bitcoin Depot had liabilities of US$49.4m due within a year, and liabilities of US$22.5m falling due after that. Offsetting these obligations, it had cash of US$29.7m as well as receivables valued at US$332.0k due within 12 months. So its liabilities total US$41.9m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Bitcoin Depot is worth US$149.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Bitcoin Depot also has more cash than debt, so we're pretty confident it can manage its debt safely.

Pleasingly, Bitcoin Depot is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 173% gain in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Bitcoin Depot's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Bitcoin Depot may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Bitcoin Depot actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Bitcoin Depot does have more liabilities than liquid assets, it also has net cash of US$11.0m. And it impressed us with free cash flow of US$43m, being 156% of its EBIT. So is Bitcoin Depot's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with Bitcoin Depot , and understanding them should be part of your investment process.

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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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.