Yahoo Finance Is Balyo (EPA:BALYO) Using Debt In A Risky Way?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk'. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Balyo SA (EPA:BALYO) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Balyo
What Is Balyo's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Balyo had €1.80m of debt, an increase on €2.3, over one year. However, it does have €8.15m in cash offsetting this, leading to net cash of €6.35m.
How Strong Is Balyo's Balance Sheet?
We can see from the most recent balance sheet that Balyo had liabilities of €21.6m falling due within a year, and liabilities of €4.96m due beyond that. On the other hand, it had cash of €8.15m and €19.1m worth of receivables due within a year. So it can boast €672.9k more liquid assets than total liabilities.
Having regard to Balyo's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €49.6m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Balyo has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Balyo'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.
Over 12 months, Balyo reported revenue of €25m, which is a gain of 26%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Balyo?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Balyo had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of €9.7m and booked a €12m accounting loss. With only €6.35m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Balyo may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. Be aware that Balyo is showing 5 warning signs in our investment analysis , and 1 of those is concerning...
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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