Is Rubicon Organics (CVE:ROMJ) A Risky Investment?

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 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 the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Rubicon Organics

How Much Debt Does Rubicon Organics Carry?

As you can see below, at the end of June 2023, Rubicon Organics had CA$10.1m of debt, up from CA$9.64m a year ago. Click the image for more detail. But on the other hand it also has CA$10.5m in cash, leading to a CA$346.6k net cash position.

How Strong Is Rubicon Organics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Rubicon Organics had liabilities of CA$8.60m due within 12 months and liabilities of CA$9.45m due beyond that. On the other hand, it had cash of CA$10.5m and CA$4.74m worth of receivables due within a year. So it has liabilities totalling CA$2.83m more than its cash and near-term receivables, combined.

Given Rubicon Organics has a market capitalization of CA$26.9m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Rubicon Organics boasts net cash, so it's fair to say it does not have a heavy debt load! 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.

Over 12 months, Rubicon Organics reported revenue of CA$42m, which is a gain of 49%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Rubicon Organics?

Although Rubicon Organics had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CA$3.3m. 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. The good news for Rubicon Organics shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. 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. Be aware that Rubicon Organics is showing 1 warning sign in our investment analysis , you should know about...

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.