The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Aegis Brands Inc. (TSE:AEG) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 Aegis Brands
What Is Aegis Brands's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Aegis Brands had CA$29.3m of debt, an increase on CA$1.65m, over one year. However, because it has a cash reserve of CA$2.22m, its net debt is less, at about CA$27.1m.
How Strong Is Aegis Brands' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Aegis Brands had liabilities of CA$8.70m due within 12 months and liabilities of CA$35.8m due beyond that. Offsetting this, it had CA$2.22m in cash and CA$3.44m in receivables that were due within 12 months. So it has liabilities totalling CA$38.8m more than its cash and near-term receivables, combined.
When you consider that this deficiency exceeds the company's CA$28.1m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Aegis Brands'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, Aegis Brands reported revenue of CA$30m, which is a gain of 142%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth
Caveat Emptor
Despite the top line growth, Aegis Brands still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$4.6m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CA$1.9m in negative free cash flow over the last year. So suffice it to say we consider the stock to be 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. Case in point: We've spotted 5 warning signs for Aegis Brands you should be aware of, and 4 of them are a bit concerning.
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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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.
About TSX:AEG
Very low and overvalued.
