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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Borealis Foods Inc. (NASDAQ:BRLS) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.
What Is Borealis Foods's Debt?
The image below, which you can click on for greater detail, shows that Borealis Foods had debt of US$43.2m at the end of June 2024, a reduction from US$68.6m over a year. On the flip side, it has US$3.13m in cash leading to net debt of about US$40.1m.
A Look At Borealis Foods' Liabilities
According to the last reported balance sheet, Borealis Foods had liabilities of US$28.7m due within 12 months, and liabilities of US$25.0m due beyond 12 months. Offsetting this, it had US$3.13m in cash and US$2.55m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$48.0m.
This deficit isn't so bad because Borealis Foods is worth US$196.3m, and thus could probably raise enough capital to shore up 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
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 3.2%. That's not what we would hope to see.
Caveat Emptor
Over the last twelve months Borealis Foods produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$17m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$21m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Borealis Foods .
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.
