Would BevCanna Enterprises (CSE:BEV) Be Better Off With Less 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.' 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 BevCanna Enterprises Inc. (CSE:BEV) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Debt?

The image below, which you can click on for greater detail, shows that at March 2021 BevCanna Enterprises had debt of CA$4.47m, up from CA$630.0k in one year. However, it does have CA$3.99m in cash offsetting this, leading to net debt of about CA$485.0k.

A Look At BevCanna Enterprises' Liabilities

According to the last reported balance sheet, BevCanna Enterprises had liabilities of CA$4.54m due within 12 months, and liabilities of CA$5.90m due beyond 12 months. Offsetting this, it had CA$3.99m in cash and CA$2.57m in receivables that were due within 12 months. So it has liabilities totalling CA$3.89m more than its cash and near-term receivables, combined.

Given BevCanna Enterprises has a market capitalization of CA$81.1m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Carrying virtually no net debt, BevCanna Enterprises has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. 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 managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

Caveat Emptor

Over the last twelve months BevCanna Enterprises produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$9.0m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$6.6m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 6 warning signs we've spotted with BevCanna Enterprises (including 4 which can't be ignored) .

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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