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.' 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 can see that Big Rock Brewery Inc. (TSE:BR) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Big Rock Brewery's Net Debt?
As you can see below, at the end of September 2021, Big Rock Brewery had CA$7.96m of debt, up from CA$3.01m a year ago. Click the image for more detail. Net debt is about the same, since the it doesn't have much cash.
How Healthy Is Big Rock Brewery's Balance Sheet?
We can see from the most recent balance sheet that Big Rock Brewery had liabilities of CA$10.0m falling due within a year, and liabilities of CA$11.3m due beyond that. Offsetting these obligations, it had cash of CA$2.0k as well as receivables valued at CA$4.15m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$17.2m.
While this might seem like a lot, it is not so bad since Big Rock Brewery has a market capitalization of CA$43.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Big Rock Brewery can strengthen its balance sheet over time. 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 reported revenue of CA$48m, which is a gain of 10%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
Importantly, Big Rock Brewery had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CA$258k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$5.6m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 Big Rock Brewery is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...
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.