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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Wildflower Brands Inc. (CSE:SUN) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Wildflower Brands's Debt?
As you can see below, Wildflower Brands had CA$6.91m of debt at March 2020, down from CA$9.26m a year prior. On the flip side, it has CA$284.8k in cash leading to net debt of about CA$6.62m.
How Healthy Is Wildflower Brands's Balance Sheet?
The latest balance sheet data shows that Wildflower Brands had liabilities of CA$9.13m due within a year, and liabilities of CA$12.0m falling due after that. Offsetting these obligations, it had cash of CA$284.8k as well as receivables valued at CA$1.40m due within 12 months. So its liabilities total CA$19.4m more than the combination of its cash and short-term receivables.
Given this deficit is actually higher than the company's market capitalization of CA$19.1m, we think shareholders really should watch Wildflower Brands's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Wildflower Brands's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Wildflower Brands reported revenue of CA$19m, which is a gain of 317%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!
Even though Wildflower Brands managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable CA$4.0m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CA$1.6m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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. For example, we've discovered 5 warning signs for Wildflower Brands (2 shouldn't be ignored!) that you should be aware of before investing here.
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. 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.
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