Is Artisanal Spirits (LON:ART) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that The Artisanal Spirits Company plc (LON:ART) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Artisanal Spirits

What Is Artisanal Spirits's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Artisanal Spirits had UK£24.1m of debt, an increase on UK£17.3m, over one year. However, it also had UK£1.24m in cash, and so its net debt is UK£22.8m.

How Strong Is Artisanal Spirits' Balance Sheet?

We can see from the most recent balance sheet that Artisanal Spirits had liabilities of UK£4.57m falling due within a year, and liabilities of UK£27.0m due beyond that. Offsetting these obligations, it had cash of UK£1.24m as well as receivables valued at UK£4.79m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£25.5m.

This deficit is considerable relative to its market capitalization of UK£27.2m, so it does suggest shareholders should keep an eye on Artisanal Spirits' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Artisanal Spirits can strengthen its balance sheet over time. 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, Artisanal Spirits reported revenue of UK£24m, which is a gain of 7.9%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Artisanal Spirits had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost UK£2.1m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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 UK£7.6m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Artisanal Spirits (2 can't be ignored!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com