Is Rubicon Organics (CVE:ROMJ) Using Debt Sensibly?

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.' 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 Rubicon Organics Inc. (CVE:ROMJ) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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 Rubicon Organics

What Is Rubicon Organics's Debt?

The chart below, which you can click on for greater detail, shows that Rubicon Organics had CA$10.9m in debt in September 2024; about the same as the year before. However, it does have CA$11.1m in cash offsetting this, leading to net cash of CA$191.9k.

How Strong Is Rubicon Organics' Balance Sheet?

The latest balance sheet data shows that Rubicon Organics had liabilities of CA$18.7m due within a year, and liabilities of CA$41.5k falling due after that. Offsetting these obligations, it had cash of CA$11.1m as well as receivables valued at CA$6.26m due within 12 months. So its liabilities total CA$1.39m more than the combination of its cash and short-term receivables.

Given Rubicon Organics has a market capitalization of CA$28.3m, it's hard to believe these liabilities pose much threat. 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.

In the last year Rubicon Organics wasn't profitable at an EBIT level, but managed to grow its revenue by 8.2%, to CA$44m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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$445k. 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. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. For example, we've discovered 3 warning signs for Rubicon Organics that you should be aware of before investing here.

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.