Does Bubs Australia (ASX: BUB) use debt wisely?
David Iben put it right when he said: “Volatility is not a risk that is close to our hearts. What matters to us is to avoid the permanent loss of capital. So it might be obvious, then, that you need to factor in debt, when you think about how risky a given stock is because too much debt can sink a business. Mostly, Bubs Australia Limited (ASX: BUB) has debt. But the real question is whether this debt makes the business risky.
Why is debt risky?
Debt helps a business until it struggles to pay it off, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap stock price just to get its debt under control. That said, the most common situation is where a business manages its debt reasonably well – and to its advantage. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest review for Bubs Australia
How much debt does Bubs Australia have?
As you can see below, Bubs Australia was in debt of A $ 2.00 million as of December 2020, which is roughly the same as the year before. You can click on the graph for more details. But he also has A $ 40.2 million in cash to make up for that, which means he has a net cash of A $ 38.2 million.
How healthy is Bubs Australia’s balance sheet?
According to the latest published balance sheet, Bubs Australia had liabilities of A $ 18.2 million due within 12 months and liabilities of A $ 6.60 million due beyond 12 months. In return for these obligations, he had cash of A $ 40.2 million as well as receivables valued at A $ 5.45 million due within 12 months. He can therefore boast of having A $ 20.9 million in liquid assets more than total Liabilities.
This short-term liquidity is a sign that Bubs Australia could probably repay its debt with ease, as its balance sheet is far from tight. Put simply, the fact that Bubs Australia has more cash than debt is arguably a good indication that it can manage its debt safely. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine Bubs Australia’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 Analyst Profit Forecast report interesting.
Last year Bubs Australia suffered a loss before interest and taxes and actually reduced its income by 11%, to A $ 46 million. We would much prefer to see the growth.
So what is the risk of Bubs Australia?
We are convinced that loss-making companies are, in general, riskier than profitable companies. And last year, Bubs Australia recorded a loss of profit before interest and taxes (EBIT), frankly. Indeed, during this period, he burned A $ 22 million in cash and made a loss of A $ 13 million. However, he has a net cash position of AU $ 38.2 million, so he has some time left before he needs more capital. Overall, its balance sheet doesn’t look too risky at the moment, but we’re still cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. We have identified 2 warning signs with Bubs Australia, and understanding them should be part of your investment process.
If you want to invest in companies that can generate profits without the burden of debt, take a look at this free list of growing companies that have net cash on the balance sheet.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
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