Health Check: How Prudently Does NewAge (NASDAQ:NBEV) Use Debt?

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 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. Importantly, NewAge, Inc. (NASDAQ:NBEV) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for NewAge

What Is NewAge's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 NewAge had US$31.5m of debt, an increase on US$20.3m, over one year. However, its balance sheet shows it holds US$80.9m in cash, so it actually has US$49.4m net cash.

How Strong Is NewAge's Balance Sheet?

According to the last reported balance sheet, NewAge had liabilities of US$107.4m due within 12 months, and liabilities of US$122.4m due beyond 12 months. On the other hand, it had cash of US$80.9m and US$10.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$138.5m.

This is a mountain of leverage relative to its market capitalization of US$199.7m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, NewAge boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine NewAge's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year NewAge wasn't profitable at an EBIT level, but managed to grow its revenue by 58%, to US$403m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is NewAge?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that NewAge had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$17m of cash and made a loss of US$19m. Given it only has net cash of US$49.4m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, NewAge may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. We've identified 2 warning signs with NewAge , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.
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