Is Big Rock Brewery (TSE:BR) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Big Rock Brewery Inc. (TSE:BR) makes use of debt. 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. 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

What Is Big Rock Brewery's Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Big Rock Brewery had debt of CA$13.3m, up from CA$5.63m in one year. Net debt is about the same, since the it doesn't have much cash.

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$15.2m falling due within a year, and liabilities of CA$12.6m due beyond that. Offsetting this, it had CA$228.0k in cash and CA$3.44m in receivables that were due within 12 months. So its liabilities total CA$24.1m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of CA$23.1m, we think shareholders really should watch Big Rock Brewery's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Big Rock Brewery can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Big Rock Brewery had a loss before interest and tax, and actually shrunk its revenue by 3.3%, to CA$44m. 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$3.0m. 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 burned through CA$8.6m in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Big Rock Brewery (1 is significant!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.