Here's Why Rubicon Organics (CVE:ROMJ) Can Afford Some Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Rubicon Organics Inc. (CVE:ROMJ) does use debt in its business. But should shareholders be worried about its use of debt?

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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Rubicon Organics

What Is Rubicon Organics's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Rubicon Organics had debt of CA$9.64m, up from CA$9.23m in one year. However, it does have CA$7.42m in cash offsetting this, leading to net debt of about CA$2.22m.

A Look At Rubicon Organics' Liabilities

Zooming in on the latest balance sheet data, we can see that Rubicon Organics had liabilities of CA$7.07m due within 12 months and liabilities of CA$8.97m due beyond that. Offsetting these obligations, it had cash of CA$7.42m as well as receivables valued at CA$4.27m due within 12 months. So it has liabilities totalling CA$4.35m more than its cash and near-term receivables, combined.

Of course, Rubicon Organics has a market capitalization of CA$31.9m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Rubicon Organics wasn't profitable at an EBIT level, but managed to grow its revenue by 68%, to CA$28m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Rubicon Organics still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CA$6.0m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$7.0m of cash over the last year. So in short it's a really risky stock. 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. For example, we've discovered 3 warning signs for Rubicon Organics (1 is potentially serious!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.