Little Green Pharma (ASX:LGP) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Little Green Pharma Ltd (ASX:LGP) makes use of debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Little Green Pharma

How Much Debt Does Little Green Pharma Carry?

As you can see below, Little Green Pharma had AU$5.64m of debt at September 2023, down from AU$11.7m a year prior. But it also has AU$6.19m in cash to offset that, meaning it has AU$557.3k net cash.

How Strong Is Little Green Pharma's Balance Sheet?

The latest balance sheet data shows that Little Green Pharma had liabilities of AU$9.09m due within a year, and liabilities of AU$3.12m falling due after that. Offsetting this, it had AU$6.19m in cash and AU$7.63m in receivables that were due within 12 months. So it actually has AU$1.61m more liquid assets than total liabilities.

This surplus suggests that Little Green Pharma has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Little Green Pharma boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Little Green Pharma'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.

Over 12 months, Little Green Pharma reported revenue of AU$23m, which is a gain of 37%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Little Green Pharma?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Little Green Pharma had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through AU$4.8m of cash and made a loss of AU$3.1m. But at least it has AU$557.3k on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Little Green Pharma may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Little Green Pharma (including 1 which is a bit concerning) .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.