Does Goodfood Market (TSE:FOOD) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Goodfood Market Corp. (TSE:FOOD) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 Goodfood Market

What Is Goodfood Market's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Goodfood Market had CA$29.7m of debt in February 2021, down from CA$38.7m, one year before. However, it does have CA$163.0m in cash offsetting this, leading to net cash of CA$133.3m.

How Healthy Is Goodfood Market's Balance Sheet?

The latest balance sheet data shows that Goodfood Market had liabilities of CA$63.9m due within a year, and liabilities of CA$49.5m falling due after that. Offsetting these obligations, it had cash of CA$163.0m as well as receivables valued at CA$4.02m due within 12 months. So it actually has CA$53.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Goodfood Market could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Goodfood Market has more cash than debt is arguably a good indication that it can manage its debt safely.

We also note that Goodfood Market improved its EBIT from a last year's loss to a positive CA$3.5m. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Goodfood Market 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. While Goodfood Market has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Goodfood Market actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Goodfood Market has net cash of CA$133.3m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CA$6.5m, being 189% of its EBIT. So we don't have any problem with Goodfood Market's use of debt. 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. To that end, you should be aware of the 3 warning signs we've spotted with Goodfood Market .

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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