Is SLANG Worldwide (CSE:SLNG) Using Too Much 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.' 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 real question is whether this debt is making the company risky.

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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for SLANG Worldwide

How Much Debt Does SLANG Worldwide Carry?

As you can see below, SLANG Worldwide had CA$2.59m of debt at September 2021, down from CA$3.87m a year prior. But on the other hand it also has CA$3.51m in cash, leading to a CA$924.6k net cash position.

How Healthy Is SLANG Worldwide's Balance Sheet?

We can see from the most recent balance sheet that SLANG Worldwide had liabilities of CA$16.7m falling due within a year, and liabilities of CA$31.1m due beyond that. Offsetting this, it had CA$3.51m in cash and CA$7.94m in receivables that were due within 12 months. So it has liabilities totalling CA$36.3m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CA$47.4m, so it does suggest shareholders should keep an eye on SLANG Worldwide's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, SLANG Worldwide boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine SLANG Worldwide's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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.

So How Risky Is SLANG Worldwide?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months SLANG Worldwide lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$13m and booked a CA$54m accounting loss. Given it only has net cash of CA$924.6k, the company may need to raise more capital if it doesn't reach break-even soon. SLANG Worldwide's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with SLANG Worldwide (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

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. 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.