Would SugarBud Craft Growers (CVE:SUGR) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for SugarBud Craft Growers

What Is SugarBud Craft Growers's Net Debt?

As you can see below, at the end of September 2020, SugarBud Craft Growers had CA$5.44m of debt, up from CA$1.89m a year ago. Click the image for more detail. On the flip side, it has CA$1.24m in cash leading to net debt of about CA$4.20m.

A Look At SugarBud Craft Growers's Liabilities

The latest balance sheet data shows that SugarBud Craft Growers had liabilities of CA$2.60m due within a year, and liabilities of CA$5.54m falling due after that. On the other hand, it had cash of CA$1.24m and CA$106.1k worth of receivables due within a year. So its liabilities total CA$6.79m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since SugarBud Craft Growers has a market capitalization of CA$16.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Given it has no significant operating revenue at the moment, shareholders will be hoping SugarBud Craft Growers can make progress and gain better traction for the business, before it runs low on cash.

Caveat Emptor

Importantly, SugarBud Craft Growers had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$6.4m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CA$6.5m of cash over the last year. So in short it's a really risky stock. 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. Take risks, for example - SugarBud Craft Growers has 6 warning signs (and 3 which are potentially serious) we think 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. 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.
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