David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies BIOLASE, Inc. (NASDAQ:BIOL) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does BIOLASE Carry?

The image below, which you can click on for greater detail, shows that at March 2021 BIOLASE had debt of US$16.3m, up from US$13.6m in one year. However, it does have US$40.8m in cash offsetting this, leading to net cash of US$24.5m.

How Strong Is BIOLASE’s Balance Sheet?

We can see from the most recent balance sheet that BIOLASE had liabilities of US$11.3m falling due within a year, and liabilities of US$18.7m due beyond that. On the other hand, it had cash of US$40.8m and US$3.27m worth of receivables due within a year. So it actually has US$14.1m more liquid assets than total liabilities.

This excess liquidity suggests that BIOLASE is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, BIOLASE boasts net cash, so it’s fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine BIOLASE’s ability to maintain a healthy balance sheet going forward.

Over 12 months, BIOLASE made a loss at the EBIT level, and saw its revenue drop to US$26m, which is a fall of 19%. We would much prefer see growth.

So How Risky Is BIOLASE?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months BIOLASE lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$15m of cash and made a loss of US$36m. Given it only has net cash of US$24.5m, the company may need to raise more capital if it doesn’t reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn’t produce free cash flow regularly. 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.