Is Little Green Pharma (ASX:LGP) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Little Green Pharma Ltd (ASX:LGP) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Little Green Pharma

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$3.29m at the end of September 2024, a reduction from AU$5.64m over a year. But it also has AU$4.83m in cash to offset that, meaning it has AU$1.54m net cash.

How Healthy Is Little Green Pharma's Balance Sheet?

According to the last reported balance sheet, Little Green Pharma had liabilities of AU$7.94m due within 12 months, and liabilities of AU$2.53m due beyond 12 months. Offsetting this, it had AU$4.83m in cash and AU$2.23m in receivables that were due within 12 months. So it has liabilities totalling AU$3.40m more than its cash and near-term receivables, combined.

Given Little Green Pharma has a market capitalization of AU$31.8m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Little Green Pharma 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 you can't view debt in total isolation; since Little Green Pharma will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Little Green Pharma reported revenue of AU$29m, which is a gain of 16%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Little Green Pharma?

While Little Green Pharma lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow AU$1.2m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 instance, we've identified 3 warning signs for Little Green Pharma (1 is potentially serious) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.