Green Rise Foods (CVE:GRF) Is Making Moderate Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Green Rise Foods Inc. (CVE:GRF) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Green Rise Foods

What Is Green Rise Foods's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Green Rise Foods had debt of CA$34.3m, up from CA$20.2m in one year. However, it does have CA$3.06m in cash offsetting this, leading to net debt of about CA$31.2m.

How Strong Is Green Rise Foods' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Green Rise Foods had liabilities of CA$8.21m due within 12 months and liabilities of CA$30.6m due beyond that. Offsetting these obligations, it had cash of CA$3.06m as well as receivables valued at CA$1.01m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$34.8m.

This deficit isn't so bad because Green Rise Foods is worth CA$68.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Green Rise Foods 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 Green Rise Foods wasn't profitable at an EBIT level, but managed to grow its revenue by 15%, to CA$18m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Green Rise Foods had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$3.1m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$1.1m of cash over the last year. So to be blunt we think it is risky. 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. To that end, you should learn about the 2 warning signs we've spotted with Green Rise Foods (including 1 which doesn't sit too well with us) .

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.