Big Rock Brewery (TSE:BR) Has Debt But No Earnings; Should You Worry?

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.' 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 Big Rock Brewery Inc. (TSE:BR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Big Rock Brewery

What Is Big Rock Brewery's Debt?

As you can see below, at the end of June 2022, Big Rock Brewery had CA$13.5m of debt, up from CA$7.42m a year ago. Click the image for more detail. And it doesn't have much cash, so its net debt is about the same.

A Look At Big Rock Brewery's Liabilities

Zooming in on the latest balance sheet data, we can see that Big Rock Brewery had liabilities of CA$24.2m due within 12 months and liabilities of CA$4.96m due beyond that. Offsetting this, it had CA$228.0k in cash and CA$5.85m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$23.1m.

This deficit casts a shadow over the CA$15.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Big Rock Brewery would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Big Rock Brewery's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Big Rock Brewery made a loss at the EBIT level, and saw its revenue drop to CA$46m, which is a fall of 2.4%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Big Rock Brewery produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$4.5m 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 had negative free cash flow of CA$5.1m over the last twelve months. 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Big Rock Brewery (at least 1 which is concerning) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.