Does 1933 Industries (CSE:TGIF) Have A Healthy Balance Sheet?

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 1933 Industries Inc. (CSE:TGIF) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Our analysis indicates that TGIF is potentially overvalued!

How Much Debt Does 1933 Industries Carry?

You can click the graphic below for the historical numbers, but it shows that as of April 2022 1933 Industries had CA$4.48m of debt, an increase on CA$4.20m, over one year. However, it also had CA$966.1k in cash, and so its net debt is CA$3.52m.

A Look At 1933 Industries' Liabilities

According to the last reported balance sheet, 1933 Industries had liabilities of CA$9.28m due within 12 months, and liabilities of CA$13.2m due beyond 12 months. On the other hand, it had cash of CA$966.1k and CA$2.36m worth of receivables due within a year. So its liabilities total CA$19.1m 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$13.5m, we think shareholders really should watch 1933 Industries's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since 1933 Industries will need earnings to service that debt. 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.

In the last year 1933 Industries wasn't profitable at an EBIT level, but managed to grow its revenue by 5.0%, to CA$12m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months 1933 Industries produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$2.8m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CA$6.3m in negative free cash flow over the last year. 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 4 warning signs for 1933 Industries 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.