Is 1933 Industries (CSE:TGIF) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that 1933 Industries Inc. (CSE:TGIF) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for 1933 Industries

How Much Debt Does 1933 Industries Carry?

As you can see below, 1933 Industries had CA$4.20m of debt at April 2021, down from CA$11.0m a year prior. But on the other hand it also has CA$5.92m in cash, leading to a CA$1.72m net cash position.

How Strong Is 1933 Industries' Balance Sheet?

According to the last reported balance sheet, 1933 Industries had liabilities of CA$6.15m due within 12 months, and liabilities of CA$13.1m due beyond 12 months. Offsetting this, it had CA$5.92m in cash and CA$1.15m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$12.2m.

1933 Industries has a market capitalization of CA$42.8m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, 1933 Industries also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is 1933 Industries'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.

Over 12 months, 1933 Industries made a loss at the EBIT level, and saw its revenue drop to CA$12m, which is a fall of 20%. That makes us nervous, to say the least.

So How Risky Is 1933 Industries?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months 1933 Industries lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$4.8m of cash and made a loss of CA$8.5m. With only CA$1.72m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 3 which are potentially serious) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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