Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Big Rock Brewery's Net Debt?
As you can see below, at the end of December 2021, Big Rock Brewery had CA$10.2m of debt, up from CA$2.95m a year ago. Click the image for more detail. However, it also had CA$228.0k in cash, and so its net debt is CA$9.99m.
How Strong Is Big Rock Brewery's Balance Sheet?
We can see from the most recent balance sheet that Big Rock Brewery had liabilities of CA$9.82m falling due within a year, and liabilities of CA$13.3m due beyond that. Offsetting these obligations, it had cash of CA$228.0k as well as receivables valued at CA$2.17m due within 12 months. So it has liabilities totalling CA$20.7m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Big Rock Brewery has a market capitalization of CA$34.9m, 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. 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.
In the last year Big Rock Brewery wasn't profitable at an EBIT level, but managed to grow its revenue by 4.5%, to CA$46m. 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. To be specific the EBIT loss came in at CA$2.0m. 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. However, it doesn't help that it burned through CA$7.4m of cash over the last year. So in short it's a really risky stock. 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. For example Big Rock Brewery has 3 warning signs (and 1 which is concerning) we think you should know about.
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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