We Think Corby Spirit and Wine (TSE:CSW.A) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Corby Spirit and Wine Limited (TSE:CSW.A) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Corby Spirit and Wine

What Is Corby Spirit and Wine's Net Debt?

As you can see below, at the end of June 2023, Corby Spirit and Wine had CA$98.0m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CA$155.0m in cash, so it actually has CA$57.0m net cash.

How Healthy Is Corby Spirit and Wine's Balance Sheet?

We can see from the most recent balance sheet that Corby Spirit and Wine had liabilities of CA$69.7m falling due within a year, and liabilities of CA$112.9m due beyond that. Offsetting this, it had CA$155.0m in cash and CA$39.6m in receivables that were due within 12 months. So it can boast CA$12.0m more liquid assets than total liabilities.

This surplus suggests that Corby Spirit and Wine has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Corby Spirit and Wine has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Corby Spirit and Wine has seen its EBIT plunge 11% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Corby Spirit and Wine's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Corby Spirit and Wine has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Corby Spirit and Wine recorded free cash flow worth 51% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Corby Spirit and Wine has net cash of CA$57.0m, as well as more liquid assets than liabilities. So we don't have any problem with Corby Spirit and Wine's use of debt. 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. We've identified 2 warning signs with Corby Spirit and Wine (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.