Is Sixty Six Capital (CSE:SIX) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Sixty Six Capital Inc. (CSE:SIX) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Sixty Six Capital

What Is Sixty Six Capital's Net Debt?

As you can see below, at the end of June 2023, Sixty Six Capital had CA$6.63m of debt, up from CA$6.21m a year ago. Click the image for more detail. However, its balance sheet shows it holds CA$10.6m in cash, so it actually has CA$3.98m net cash.

How Healthy Is Sixty Six Capital's Balance Sheet?

According to the last reported balance sheet, Sixty Six Capital had liabilities of CA$1.03m due within 12 months, and liabilities of CA$6.63m due beyond 12 months. On the other hand, it had cash of CA$10.6m and CA$1.3k worth of receivables due within a year. So it actually has CA$2.96m more liquid assets than total liabilities.

This surplus liquidity suggests that Sixty Six Capital's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Sixty Six Capital boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Sixty Six Capital will need earnings to service that debt. 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.

It seems likely shareholders hope that Sixty Six Capital can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

So How Risky Is Sixty Six Capital?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Sixty Six Capital had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CA$399k and booked a CA$856k accounting loss. With only CA$3.98m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Sixty Six Capital has 5 warning signs (and 4 which don't sit too well with us) we think you should know about.

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.