Is SLANG Worldwide (CSE:SLNG) 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. We note that SLANG Worldwide Inc. (CSE:SLNG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for SLANG Worldwide

What Is SLANG Worldwide's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 SLANG Worldwide had CA$17.0m of debt, an increase on CA$10.3m, over one year. However, it also had CA$7.60m in cash, and so its net debt is CA$9.41m.

How Healthy Is SLANG Worldwide's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SLANG Worldwide had liabilities of CA$6.42m due within 12 months and liabilities of CA$22.2m due beyond that. On the other hand, it had cash of CA$7.60m and CA$2.68m worth of receivables due within a year. So its liabilities total CA$18.4m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CA$6.61m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. 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. There's no doubt that we learn most about debt from the balance sheet. But it is SLANG Worldwide's earnings that will influence how the balance sheet holds up in the future. 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.

Given it has no significant operating revenue at the moment, shareholders will be hoping SLANG Worldwide can make progress and gain better traction for the business, before it runs low on cash.

Caveat Emptor

Over the last twelve months SLANG Worldwide produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$11m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through CA$322k in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for SLANG Worldwide you should know about.

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.