Health Check: How Prudently Does SLANG Worldwide (CSE:SLNG) Use 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 can see that SLANG Worldwide Inc. (CSE:SLNG) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for SLANG Worldwide

How Much Debt Does SLANG Worldwide Carry?

The image below, which you can click on for greater detail, shows that at September 2023 SLANG Worldwide had debt of CA$21.9m, up from CA$13.3m in one year. However, because it has a cash reserve of CA$6.77m, its net debt is less, at about CA$15.1m.

A Look At SLANG Worldwide's Liabilities

According to the last reported balance sheet, SLANG Worldwide had liabilities of CA$7.54m due within 12 months, and liabilities of CA$27.1m due beyond 12 months. Offsetting these obligations, it had cash of CA$6.77m as well as receivables valued at CA$2.85m due within 12 months. So it has liabilities totalling CA$25.0m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CA$6.83m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, SLANG Worldwide would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is SLANG Worldwide'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.

It seems likely shareholders hope that SLANG Worldwide can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

Caveat Emptor

Importantly, SLANG Worldwide had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CA$7.0m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost CA$26m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. 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. For example - SLANG Worldwide has 3 warning signs we think you should be aware of.

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.