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. Importantly, CubicFarm Systems Corp. (TSE:CUB) does carry debt. But is this debt a concern to shareholders?
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. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is CubicFarm Systems's Net Debt?
The image below, which you can click on for greater detail, shows that at December 2021 CubicFarm Systems had debt of CA$2.16m, up from CA$2.03m in one year. But on the other hand it also has CA$21.4m in cash, leading to a CA$19.2m net cash position.
How Healthy Is CubicFarm Systems' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that CubicFarm Systems had liabilities of CA$9.78m due within 12 months and liabilities of CA$3.81m due beyond that. Offsetting these obligations, it had cash of CA$21.4m as well as receivables valued at CA$2.13m due within 12 months. So it can boast CA$9.92m more liquid assets than total liabilities.
This short term liquidity is a sign that CubicFarm Systems could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that CubicFarm Systems has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if CubicFarm Systems 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.
In the last year CubicFarm Systems wasn't profitable at an EBIT level, but managed to grow its revenue by 8.0%, to CA$5.3m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is CubicFarm Systems?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year CubicFarm Systems had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$38m of cash and made a loss of CA$29m. With only CA$19.2m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for CubicFarm Systems you should be aware of, and 1 of them is a bit concerning.
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.
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.