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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Big Rock Brewery

What Is Big Rock Brewery's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Big Rock Brewery had CA$13.8m of debt, an increase on CA$10.2m, over one year. However, it also had CA$612.0k in cash, and so its net debt is CA$13.1m.

How Healthy Is Big Rock Brewery's Balance Sheet?

The latest balance sheet data shows that Big Rock Brewery had liabilities of CA$15.1m due within a year, and liabilities of CA$11.3m falling due after that. Offsetting this, it had CA$612.0k in cash and CA$2.55m in receivables that were due within 12 months. So it has liabilities totalling CA$23.3m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CA$10.8m 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'd watch its balance sheet closely, without a doubt. After all, Big Rock Brewery would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. 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$47m, which is a gain of 2.4%, 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.

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$6.9m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of CA$2.6m over the last twelve months. That means it's on the risky side of things. 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. For example - Big Rock Brewery has 3 warning signs we think you should be aware of.

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.

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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.