Is 1933 Industries (CSE:TGIF) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, 1933 Industries Inc. (CSE:TGIF) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for 1933 Industries

What Is 1933 Industries's Net Debt?

You can click the graphic below for the historical numbers, but it shows that 1933 Industries had CA$4.39m of debt in January 2022, down from CA$8.44m, one year before. However, it also had CA$803.2k in cash, and so its net debt is CA$3.59m.

A Look At 1933 Industries' Liabilities

The latest balance sheet data shows that 1933 Industries had liabilities of CA$8.00m due within a year, and liabilities of CA$13.1m falling due after that. Offsetting these obligations, it had cash of CA$803.2k as well as receivables valued at CA$1.94m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$18.4m.

When you consider that this deficiency exceeds the company's CA$13.5m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. 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 4.7%, 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

Importantly, 1933 Industries had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CA$1.7m 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 had negative free cash flow of CA$6.3m 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. We've identified 4 warning signs with 1933 Industries (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

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.