Cooks Global Foods (NZSE:CGF) Has Debt But No Earnings; Should You Worry?

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. Importantly, Cooks Global Foods Limited (NZSE:CGF) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Cooks Global Foods

How Much Debt Does Cooks Global Foods Carry?

As you can see below, Cooks Global Foods had NZ$5.70m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have NZ$1.49m in cash offsetting this, leading to net debt of about NZ$4.21m.

A Look At Cooks Global Foods' Liabilities

Zooming in on the latest balance sheet data, we can see that Cooks Global Foods had liabilities of NZ$13.6m due within 12 months and liabilities of NZ$27.6m due beyond that. Offsetting these obligations, it had cash of NZ$1.49m as well as receivables valued at NZ$5.33m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NZ$34.4m.

Given this deficit is actually higher than the company's market capitalization of NZ$26.4m, we think shareholders really should watch Cooks Global Foods's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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 Cooks Global Foods will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Cooks Global Foods made a loss at the EBIT level, and saw its revenue drop to NZ$3.1m, which is a fall of 27%. To be frank that doesn't bode well.

Caveat Emptor

While Cooks Global Foods's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable NZ$2.8m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of NZ$3.7m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. 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 instance, we've identified 5 warning signs for Cooks Global Foods (1 can't be ignored) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. 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.
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