Is Ignite International Brands (CSE:BILZ) A Risky Investment?

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.' 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. As with many other companies Ignite International Brands, Ltd. (CSE:BILZ) makes use of debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Ignite International Brands

What Is Ignite International Brands's Debt?

You can click the graphic below for the historical numbers, but it shows that Ignite International Brands had CA$15.5m of debt in September 2021, down from CA$29.6m, one year before. However, it does have CA$4.66m in cash offsetting this, leading to net debt of about CA$10.9m.

A Look At Ignite International Brands' Liabilities

Zooming in on the latest balance sheet data, we can see that Ignite International Brands had liabilities of CA$11.6m due within 12 months and liabilities of CA$14.7m due beyond that. On the other hand, it had cash of CA$4.66m and CA$7.57m worth of receivables due within a year. So its liabilities total CA$14.1m more than the combination of its cash and short-term receivables.

Of course, Ignite International Brands has a market capitalization of CA$309.7m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ignite International Brands 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 Ignite International Brands wasn't profitable at an EBIT level, but managed to grow its revenue by 337%, to CA$40m. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Even though Ignite International Brands managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at CA$4.9m. 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$11m of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Ignite International Brands (2 don't sit too well with us!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.