Is SLANG Worldwide (CSE:SLNG) A Risky Investment?

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 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. We can see that SLANG Worldwide Inc. (CSE:SLNG) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

Check out our latest analysis for SLANG Worldwide

What Is SLANG Worldwide's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 SLANG Worldwide had CA$18.9m of debt, an increase on CA$11.6m, over one year. However, it does have CA$6.09m in cash offsetting this, leading to net debt of about CA$12.8m.

A Look At SLANG Worldwide's Liabilities

According to the last reported balance sheet, SLANG Worldwide had liabilities of CA$6.82m due within 12 months, and liabilities of CA$24.0m due beyond 12 months. On the other hand, it had cash of CA$6.09m and CA$3.70m worth of receivables due within a year. So it has liabilities totalling CA$21.0m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CA$11.0m 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 definitely think shareholders need to watch this one closely. After all, SLANG Worldwide would likely require a major re-capitalisation if it had to pay its creditors today. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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$11m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of CA$331k over the last twelve months. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for SLANG Worldwide you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.