Is Canlan Ice Sports (TSE:ICE) Weighed On By Its Debt Load?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Canlan Ice Sports Corp. (TSE:ICE) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Canlan Ice Sports

What Is Canlan Ice Sports's Net Debt?

As you can see below, Canlan Ice Sports had CA$54.3m of debt at June 2021, down from CA$57.5m a year prior. However, it also had CA$4.59m in cash, and so its net debt is CA$49.7m.

How Strong Is Canlan Ice Sports' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Canlan Ice Sports had liabilities of CA$21.7m due within 12 months and liabilities of CA$56.8m due beyond that. On the other hand, it had cash of CA$4.59m and CA$958.0k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$73.0m.

This deficit casts a shadow over the CA$43.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Canlan Ice Sports would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Canlan Ice Sports's earnings that will influence how the balance sheet holds up in the future. 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$26m, which is a fall of 59%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Canlan Ice Sports's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CA$18m 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$1.3m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Canlan Ice Sports is showing 3 warning signs in our investment analysis , and 2 of those make us uncomfortable...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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