Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that Bitfarms Ltd. (CVE: BITF) uses debt in its business. But the most important question is: what risk does this debt create?
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we look at debt levels, we first look at cash and debt levels, together.
Check out our latest analysis for Bitfarms
What is Bitfarms net debt?
As you can see below, Bitfarms was in debt of US $ 11.0 million in September 2021, up from US $ 16.9 million the year before. However, his balance sheet shows that he holds $ 43.3 million in cash, so he actually has $ 32.3 million in net cash.
How strong is Bitfarms’ balance sheet?
The latest balance sheet data shows that Bitfarms had liabilities of US $ 27.7 million due within one year, and liabilities of US $ 12.9 million due after that. On the other hand, he had $ 43.3 million in cash and $ 3.14 million in receivables due within one year. So he actually has US $ 5.79 million Following liquid assets as total liabilities.
This state of affairs indicates that Bitfarms’ balance sheet looks quite strong, as its total liabilities roughly equal its liquid assets. So the $ 974.9 million company is highly unlikely to run out of cash, but it’s still worth keeping an eye on the balance sheet. In short, Bitfarms has clear cash flow, so it’s fair to say that it doesn’t have a lot of debt!
It was also good to see that despite losing money on the EBIT line last year, Bitfarms has been a game-changer over the past 12 months, delivering EBIT of US $ 48 million. When analyzing debt levels, the balance sheet is the obvious place to start. But it is future profits, more than anything, that will determine Bitfarms’ 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.
Finally, a business can only pay off its debts with hard cash, not with book profits. While Bitfarms has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building (or erodes) that cash balance. . Over the past year, Bitfarms has burned a lot of money. While investors no doubt expect this situation to reverse in due course, it clearly means that its use of debt is riskier.
While it’s always a good idea to investigate a company’s debt, in this case Bitfarms has US $ 32.3 million in net cash and a decent balance sheet. So we have no problem with Bitfarms’ use of debt. When analyzing debt levels, the balance sheet is the obvious place to start. However, not all investment risks lie on the balance sheet – far from it. To this end, you should inquire about the 4 warning signs we spotted with Bitfarms (2 of which are potentially serious).
If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.
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