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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that 1933 Industries Inc. (CSE:TGIF) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for 1933 Industries

What Is 1933 Industries's Net Debt?

As you can see below, 1933 Industries had CA$4.46m of debt, at April 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have CA$1.69m in cash offsetting this, leading to net debt of about CA$2.76m.

How Strong Is 1933 Industries' Balance Sheet?

According to the last reported balance sheet, 1933 Industries had liabilities of CA$8.92m due within 12 months, and liabilities of CA$13.5m due beyond 12 months. On the other hand, it had cash of CA$1.69m and CA$2.20m worth of receivables due within a year. So its liabilities total CA$18.5m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CA$6.92m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, 1933 Industries would likely require a major re-capitalisation if it had to pay its creditors today. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, 1933 Industries reported revenue of CA$16m, which is a gain of 28%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, 1933 Industries still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CA$9.4m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized CA$3.2m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. Case in point: We've spotted 5 warning signs for 1933 Industries you should be aware of, and 4 of them make us uncomfortable.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.