Hill Street Beverage (CVE:BEER) Has Debt But No Earnings; Should You Worry?

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.' 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. As with many other companies Hill Street Beverage Company Inc. (CVE:BEER) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Hill Street Beverage

How Much Debt Does Hill Street Beverage Carry?

As you can see below, at the end of September 2021, Hill Street Beverage had CA$2.20m of debt, up from CA$840.6k a year ago. Click the image for more detail. However, its balance sheet shows it holds CA$2.30m in cash, so it actually has CA$106.8k net cash.

How Healthy Is Hill Street Beverage's Balance Sheet?

We can see from the most recent balance sheet that Hill Street Beverage had liabilities of CA$983.1k falling due within a year, and liabilities of CA$2.18m due beyond that. Offsetting this, it had CA$2.30m in cash and CA$423.2k in receivables that were due within 12 months. So its liabilities total CA$433.4k more than the combination of its cash and short-term receivables.

Of course, Hill Street Beverage has a market capitalization of CA$9.55m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Hill Street Beverage also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hill Street Beverage'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.

In the last year Hill Street Beverage wasn't profitable at an EBIT level, but managed to grow its revenue by 51%, to CA$2.5m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Hill Street Beverage?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Hill Street Beverage lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$2.7m of cash and made a loss of CA$3.2m. Given it only has net cash of CA$106.8k, the company may need to raise more capital if it doesn't reach break-even soon. Hill Street Beverage's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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 learn about the 7 warning signs we've spotted with Hill Street Beverage (including 4 which shouldn't be ignored) .

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.