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.' 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 Canlan Ice Sports Corp. (TSE:ICE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. 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 step when considering a company's debt levels is to consider its cash and debt together.
What Is Canlan Ice Sports's Debt?
As you can see below, Canlan Ice Sports had CA$57.5m of debt at June 2020, down from CA$60.1m a year prior. However, it does have CA$6.09m in cash offsetting this, leading to net debt of about CA$51.4m.
How Strong Is Canlan Ice Sports's Balance Sheet?
We can see from the most recent balance sheet that Canlan Ice Sports had liabilities of CA$20.8m falling due within a year, and liabilities of CA$62.4m due beyond that. Offsetting this, it had CA$6.09m in cash and CA$2.72m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$74.4m.
The deficiency here weighs heavily on the CA$48.7m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Canlan Ice Sports would likely require a major re-capitalisation if it had to pay its creditors today. 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 Canlan Ice Sports 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, Canlan Ice Sports made a loss at the EBIT level, and saw its revenue drop to CA$64m, which is a fall of 28%. To be frank that doesn't bode well.
While Canlan Ice Sports's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CA$4.3m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through CA$6.2m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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. For example, we've discovered 2 warning signs for Canlan Ice Sports (1 is a bit concerning!) 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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This article by Simply Wall St is general in nature. 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.
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