Here's Why Little Green Pharma (ASX:LGP) Can Afford Some Debt

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.' 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 note that Little Green Pharma Ltd (ASX:LGP) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

What Is Little Green Pharma's Net Debt?

The image below, which you can click on for greater detail, shows that Little Green Pharma had debt of AU$3.09m at the end of March 2025, a reduction from AU$3.50m over a year. However, because it has a cash reserve of AU$2.38m, its net debt is less, at about AU$709.0k.

A Look At Little Green Pharma's Liabilities

According to the last reported balance sheet, Little Green Pharma had liabilities of AU$8.74m due within 12 months, and liabilities of AU$2.37m due beyond 12 months. Offsetting these obligations, it had cash of AU$2.38m as well as receivables valued at AU$3.97m due within 12 months. So its liabilities total AU$4.77m more than the combination of its cash and short-term receivables.

Of course, Little Green Pharma has a market capitalization of AU$40.5m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Little Green Pharma's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

See our latest analysis for Little Green Pharma

In the last year Little Green Pharma wasn't profitable at an EBIT level, but managed to grow its revenue by 35%, to AU$37m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Little Green Pharma 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 AU$3.5m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled AU$1.6m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Little Green Pharma (1 makes us a bit uncomfortable) you should be aware of.

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.