SugarBud Craft Growers (CVE:SUGR) Is Making Moderate Use Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 SugarBud Craft Growers Corp. (CVE:SUGR) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for SugarBud Craft Growers

What Is SugarBud Craft Growers's Debt?

The image below, which you can click on for greater detail, shows that SugarBud Craft Growers had debt of CA$5.23m at the end of June 2021, a reduction from CA$5.68m over a year. However, it also had CA$235.9k in cash, and so its net debt is CA$5.00m.

How Strong Is SugarBud Craft Growers' Balance Sheet?

According to the last reported balance sheet, SugarBud Craft Growers had liabilities of CA$3.12m due within 12 months, and liabilities of CA$4.99m due beyond 12 months. Offsetting this, it had CA$235.9k in cash and CA$320.0k in receivables that were due within 12 months. So its liabilities total CA$7.55m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because SugarBud Craft Growers is worth CA$17.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is SugarBud Craft Growers's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

While it hasn't made a profit, at least SugarBud Craft Growers booked its first revenue as a publicly listed company, in the last twelve months.

Caveat Emptor

Over the last twelve months SugarBud Craft Growers produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CA$310k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example SugarBud Craft Growers has 5 warning signs (and 2 which shouldn't be ignored) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.