Auditors Have Doubts About Hill Street Beverage (CVE:HILL)

Unfortunately for shareholders, when Hill Street Beverage Company Inc. (CVE:HILL) reported results for the period to June 2022, its auditors, Meyers Norris Penny LLP - MNP LLP, expressed uncertainty about whether it can continue as a going concern. Thus we can say that, based on the results to that date, the company should raise capital or otherwise raise cash, without much delay.

Since the company probably needs cash fairly quickly, it may be in a position where it has to accept whatever terms it can get. So current risks on the balance sheet could have a big impact on how shareholders fare from here. Debt is always a risk factor in these cases, as creditors could be in a position to wind up the company, in the worst case scenario.

Check out the opportunities and risks within the XX Retail Distributors industry.

What Is Hill Street Beverage's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Hill Street Beverage had debt of CA$2.34m, up from CA$2.15m in one year. However, it does have CA$1.15m in cash offsetting this, leading to net debt of about CA$1.19m.

How Strong Is Hill Street Beverage's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hill Street Beverage had liabilities of CA$1.17m due within 12 months and liabilities of CA$2.23m due beyond that. On the other hand, it had cash of CA$1.15m and CA$1.35m worth of receivables due within a year. So its liabilities total CA$895.4k more than the combination of its cash and short-term receivables.

Since publicly traded Hill Street Beverage shares are worth a total of CA$6.74m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hill Street Beverage's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Hill Street Beverage wasn't profitable at an EBIT level, but managed to grow its revenue by 46%, to CA$3.2m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Hill Street Beverage managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping CA$2.3m. 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$1.8m in negative free cash flow over the last twelve months. So in short it's a really risky stock. We're too cautious to want to invest in a company after an auditor has expressed doubts about its ability to continue as a going concern. That's because companies should always make sure the auditor has confidence that the company will continue as a going concern, in our view. 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. For example Hill Street Beverage has 6 warning signs (and 4 which are concerning) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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