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David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.’ So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies. Goodfood Market Corp. (TSE:FOOD) makes use of debt. But is this debt a concern to shareholders?
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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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. 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.
What Is Goodfood Market’s Net Debt?
The image below, which you can click on for greater detail, shows that at February 2019 Goodfood Market had debt of CA$7.51m, up from CA$2.73m in one year. But it also has CA$46.3m in cash to offset that, meaning it has CA$38.8m net cash.
How Healthy Is Goodfood Market’s Balance Sheet?
We can see from the most recent balance sheet that Goodfood Market had liabilities of CA$28.8m falling due within a year, and liabilities of CA$18.6m due beyond that. Offsetting these obligations, it had cash of CA$46.3m as well as receivables valued at CA$1.98m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
This state of affairs indicates that Goodfood Market’s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it’s hard to imagine that the CA$172.7m company is struggling for cash, we still think it’s worth monitoring its balance sheet. Given that Goodfood Market has more cash than debt, we’re pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Goodfood Market’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.
Over 12 months, Goodfood Market reported revenue of CA$137m, which is a gain of 143%. So there’s no doubt that shareholders are cheering for growth
So How Risky Is Goodfood Market?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Goodfood Market had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through CA$1.5m of cash and made a loss of CA$18m. While this does make the company a bit risky, it’s important to remember it has net cash of CA$46m. That means it could keep spending at its current rate for more than five years. Importantly, Goodfood Market’s revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Goodfood Market insider transactions.
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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.