Is Big Rock Brewery (TSE:BR) A Risky Investment?

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. 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. If things get really bad, the lenders can take control of the business. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Big Rock Brewery

How Much Debt Does Big Rock Brewery Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Big Rock Brewery had debt of CA$19.0m, up from CA$16.2m in one year. However, it also had CA$889.0k in cash, and so its net debt is CA$18.1m.

How Healthy Is Big Rock Brewery's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Big Rock Brewery had liabilities of CA$21.9m due within 12 months and liabilities of CA$11.5m due beyond that. Offsetting this, it had CA$889.0k in cash and CA$5.97m in receivables that were due within 12 months. So it has liabilities totalling CA$26.5m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CA$8.96m 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, Big Rock Brewery would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Big Rock Brewery will need earnings to service that debt. 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.

In the last year Big Rock Brewery had a loss before interest and tax, and actually shrunk its revenue by 9.2%, to CA$41m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Big Rock Brewery produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$4.4m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through CA$3.9m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Big Rock Brewery , and understanding them should be part of your investment process.

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.