Is BevCanna Enterprises (CSE:BEV) Using Too Much Debt?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies BevCanna Enterprises Inc. (CSE:BEV) makes use of 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 BevCanna Enterprises

What Is BevCanna Enterprises's Net Debt?

As you can see below, at the end of September 2021, BevCanna Enterprises had CA$2.91m of debt, up from CA$651.2k a year ago. Click the image for more detail. However, it also had CA$847.0k in cash, and so its net debt is CA$2.06m.

How Healthy Is BevCanna Enterprises' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that BevCanna Enterprises had liabilities of CA$5.35m due within 12 months and liabilities of CA$4.46m due beyond that. On the other hand, it had cash of CA$847.0k and CA$2.42m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$6.55m.

Of course, BevCanna Enterprises has a market capitalization of CA$37.8m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since BevCanna Enterprises will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year BevCanna Enterprises wasn't profitable at an EBIT level, but managed to grow its revenue by 2,602%, to CA$2.5m. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Despite the top line growth, BevCanna Enterprises still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CA$13m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$8.8m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Be aware that BevCanna Enterprises is showing 6 warning signs in our investment analysis , and 3 of those are concerning...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.