Would Coffee Holding (NASDAQ:JVA) Be Better Off With Less 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.' 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 can see that Coffee Holding Co., Inc. (NASDAQ:JVA) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Coffee Holding

What Is Coffee Holding's Debt?

As you can see below, at the end of January 2023, Coffee Holding had US$8.34m of debt, up from US$5.42m a year ago. Click the image for more detail. On the flip side, it has US$4.25m in cash leading to net debt of about US$4.09m.

A Look At Coffee Holding's Liabilities

According to the last reported balance sheet, Coffee Holding had liabilities of US$5.17m due within 12 months, and liabilities of US$11.7m due beyond 12 months. Offsetting these obligations, it had cash of US$4.25m as well as receivables valued at US$6.90m due within 12 months. So it has liabilities totalling US$5.67m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$8.68m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Coffee Holding'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 Coffee Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 7.7%, to US$67m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Coffee Holding had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$3.9m. 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. However, it doesn't help that it burned through US$2.6m of cash over the last year. So in short it's a really risky stock. 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. Be aware that Coffee Holding is showing 2 warning signs in our investment analysis , you should know about...

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. 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.