Health Check: How Prudently Does Rubicon Organics (CVE:ROMJ) Use Debt?

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. As with many other companies Rubicon Organics Inc. (CVE:ROMJ) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Rubicon Organics

What Is Rubicon Organics's Net Debt?

As you can see below, at the end of June 2024, Rubicon Organics had CA$10.8m of debt, up from CA$10.1m a year ago. Click the image for more detail. But it also has CA$11.3m in cash to offset that, meaning it has CA$491.4k net cash.

How Strong Is Rubicon Organics' Balance Sheet?

We can see from the most recent balance sheet that Rubicon Organics had liabilities of CA$19.3m falling due within a year, and liabilities of CA$58.2k due beyond that. Offsetting these obligations, it had cash of CA$11.3m as well as receivables valued at CA$5.18m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$2.87m.

Of course, Rubicon Organics has a market capitalization of CA$23.4m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Rubicon Organics boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Rubicon Organics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Rubicon Organics saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is Rubicon Organics?

While Rubicon Organics lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CA$386k. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Rubicon Organics you should be aware of.

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.