Is Goodfood Market (TSE:FOOD) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that Goodfood Market Corp. (TSE:FOOD) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Goodfood Market

What Is Goodfood Market's Net Debt?

The image below, which you can click on for greater detail, shows that Goodfood Market had debt of CA$28.7m at the end of May 2021, a reduction from CA$52.2m over a year. However, its balance sheet shows it holds CA$157.1m in cash, so it actually has CA$128.4m net cash.

How Strong Is Goodfood Market's Balance Sheet?

According to the last reported balance sheet, Goodfood Market had liabilities of CA$64.7m due within 12 months, and liabilities of CA$59.9m due beyond 12 months. On the other hand, it had cash of CA$157.1m and CA$5.02m worth of receivables due within a year. So it actually has CA$37.6m 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. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Goodfood Market reported revenue of CA$384m, which is a gain of 55%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Goodfood Market?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Goodfood Market had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CA$4.1m of cash and made a loss of CA$7.1m. While this does make the company a bit risky, it's important to remember it has net cash of CA$128.4m. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Goodfood Market may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Goodfood Market you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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