Is Hill Street Beverage (CVE:BEER) Using Too Much Debt?

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 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. We note that Hill Street Beverage Company Inc. (CVE:BEER) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hill Street Beverage

How Much Debt Does Hill Street Beverage Carry?

As you can see below, at the end of December 2020, Hill Street Beverage had CA$3.36m of debt, up from CA$24.9k a year ago. Click the image for more detail. However, it also had CA$774.5k in cash, and so its net debt is CA$2.58m.

A Look At Hill Street Beverage's Liabilities

According to the last reported balance sheet, Hill Street Beverage had liabilities of CA$1.56m due within 12 months, and liabilities of CA$3.38m due beyond 12 months. On the other hand, it had cash of CA$774.5k and CA$538.6k worth of receivables due within a year. So its liabilities total CA$3.63m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Hill Street Beverage has a market capitalization of CA$12.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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.

Over 12 months, Hill Street Beverage reported revenue of CA$1.7m, which is a gain of 25%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Hill Street Beverage's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping CA$2.0m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$2.0m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. Case in point: We've spotted 5 warning signs for Hill Street Beverage you should be aware of, and 2 of them can'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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