Is BevCanna Enterprises (CSE:BEV) Weighed On By Its Debt Load?

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 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?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 BevCanna Enterprises

What Is BevCanna Enterprises's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 BevCanna Enterprises had CA$5.45m of debt, an increase on CA$2.95m, over one year. However, it does have CA$185.9k in cash offsetting this, leading to net debt of about CA$5.27m.

How Strong Is BevCanna Enterprises' Balance Sheet?

According to the last reported balance sheet, BevCanna Enterprises had liabilities of CA$17.7m due within 12 months, and liabilities of CA$230.0k due beyond 12 months. On the other hand, it had cash of CA$185.9k and CA$1.18m worth of receivables due within a year. So its liabilities total CA$16.5m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CA$9.68m 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 definitely think shareholders need to watch this one closely. After all, BevCanna Enterprises 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 it is BevCanna Enterprises'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, BevCanna Enterprises made a loss at the EBIT level, and saw its revenue drop to CA$4.2m, which is a fall of 17%. We would much prefer see growth.

Caveat Emptor

While BevCanna Enterprises's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CA$4.9m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of CA$15m. In the meantime, 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. Be aware that BevCanna Enterprises is showing 4 warning signs in our investment analysis , and 3 of those are 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.