Health Check: How Prudently Does Village Farms International (NASDAQ:VFF) Use 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 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. As with many other companies Village Farms International, Inc. (NASDAQ:VFF) makes use of debt. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

What Is Village Farms International's Net Debt?

The image below, which you can click on for greater detail, shows that Village Farms International had debt of US$44.6m at the end of December 2024, a reduction from US$52.1m over a year. However, because it has a cash reserve of US$24.6m, its net debt is less, at about US$19.9m.

A Look At Village Farms International's Liabilities

The latest balance sheet data shows that Village Farms International had liabilities of US$62.2m due within a year, and liabilities of US$63.1m falling due after that. On the other hand, it had cash of US$24.6m and US$34.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$66.7m.

This deficit is considerable relative to its market capitalization of US$73.2m, so it does suggest shareholders should keep an eye on Village Farms International's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Village Farms International can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

View our latest analysis for Village Farms International

In the last year Village Farms International wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to US$336m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Village Farms International produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$24m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of US$36m into a profit. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Village Farms International you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.