Health Check: How Prudently Does good natured Products (CVE:GDNP) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, good natured Products Inc. (CVE:GDNP) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for good natured Products

What Is good natured Products's Net Debt?

As you can see below, at the end of September 2022, good natured Products had CA$48.7m of debt, up from CA$39.8m a year ago. Click the image for more detail. However, it does have CA$11.3m in cash offsetting this, leading to net debt of about CA$37.4m.

How Healthy Is good natured Products' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that good natured Products had liabilities of CA$26.4m due within 12 months and liabilities of CA$55.8m due beyond that. Offsetting this, it had CA$11.3m in cash and CA$16.0m in receivables that were due within 12 months. So its liabilities total CA$54.8m 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$50.8m, we think shareholders really should watch good natured Products's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if good natured Products can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, good natured Products reported revenue of CA$101m, which is a gain of 131%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Despite the top line growth, good natured Products still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$1.8m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through CA$7.9m in negative free cash flow over the last year. So suffice it to say we 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. Case in point: We've spotted 3 warning signs for good natured Products you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.