Is Borealis Foods (NASDAQ:BRLS) A Risky Investment?

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 Borealis Foods Inc. (NASDAQ:BRLS) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Borealis Foods

What Is Borealis Foods's Net Debt?

The image below, which you can click on for greater detail, shows that Borealis Foods had debt of US$44.8m at the end of September 2024, a reduction from US$70.5m over a year. And it doesn't have much cash, so its net debt is about the same.

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How Strong Is Borealis Foods' Balance Sheet?

The latest balance sheet data shows that Borealis Foods had liabilities of US$30.3m due within a year, and liabilities of US$26.5m falling due after that. Offsetting these obligations, it had cash of US$721.5k as well as receivables valued at US$2.91m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$53.2m.

Borealis Foods has a market capitalization of US$128.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Borealis Foods will need earnings to service that debt. 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.

Over 12 months, Borealis Foods made a loss at the EBIT level, and saw its revenue drop to US$28m, which is a fall of 6.2%. That's not what we would hope to see.

Caveat Emptor

Importantly, Borealis Foods had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$17m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$19m of cash over the last year. So suffice it to say we consider the stock very risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Borealis Foods (of which 2 don't sit too well with us!) you should know about.

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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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.