Would Candy Club Holdings (ASX:CLB) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Candy Club Holdings Limited (ASX:CLB) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Candy Club Holdings

How Much Debt Does Candy Club Holdings Carry?

As you can see below, at the end of December 2020, Candy Club Holdings had US$2.80m of debt, up from US$1.57m a year ago. Click the image for more detail. On the flip side, it has US$2.02m in cash leading to net debt of about US$778.7k.

How Healthy Is Candy Club Holdings' Balance Sheet?

According to the last reported balance sheet, Candy Club Holdings had liabilities of US$3.30m due within 12 months, and liabilities of US$1.53m due beyond 12 months. On the other hand, it had cash of US$2.02m and US$448.7k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$2.37m.

Of course, Candy Club Holdings has a market capitalization of US$56.7m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. But either way, Candy Club Holdings has virtually no net debt, 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 Candy Club Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Candy Club Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 82%, to US$8.7m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Candy Club Holdings managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost US$3.6m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$5.3m of cash over the last year. So suffice it to say we consider the stock very risky. 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. For example, we've discovered 4 warning signs for Candy Club Holdings (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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