StorageVault Canada (CVE:SVI) Has A Somewhat Strained Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, StorageVault Canada Inc. (CVE:SVI) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for StorageVault Canada

What Is StorageVault Canada's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2021 StorageVault Canada had debt of CA$1.28b, up from CA$1.04b in one year. And it doesn't have much cash, so its net debt is about the same.

How Healthy Is StorageVault Canada's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that StorageVault Canada had liabilities of CA$19.2m due within 12 months and liabilities of CA$1.38b due beyond that. Offsetting these obligations, it had cash of CA$20.3m as well as receivables valued at CA$3.88m due within 12 months. So it has liabilities totalling CA$1.38b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CA$1.64b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

StorageVault Canada shareholders face the double whammy of a high net debt to EBITDA ratio (15.6), and fairly weak interest coverage, since EBIT is just 0.038 times the interest expense. This means we'd consider it to have a heavy debt load. However, the silver lining was that StorageVault Canada achieved a positive EBIT of CA$1.5m in the last twelve months, an improvement on the prior year's loss. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if StorageVault Canada can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, StorageVault Canada actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

Neither StorageVault Canada's ability to cover its interest expense with its EBIT nor its net debt to EBITDA gave us confidence in its ability to take on more debt. But the good news is it seems to be able to convert EBIT to free cash flow with ease. When we consider all the factors discussed, it seems to us that StorageVault Canada is taking some risks with its use of debt. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for StorageVault Canada (1 is concerning!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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