Health Check: How Prudently Does Safety Shot (NASDAQ:SHOT) 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 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 note that Safety Shot, Inc. (NASDAQ:SHOT) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Check out our latest analysis for Safety Shot

What Is Safety Shot's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Safety Shot had debt of US$2.28m, up from US$2.05m in one year. However, it does have US$3.28m in cash offsetting this, leading to net cash of US$998.2k.

How Strong Is Safety Shot's Balance Sheet?

The latest balance sheet data shows that Safety Shot had liabilities of US$3.37m due within a year, and liabilities of US$853.9k falling due after that. Offsetting these obligations, it had cash of US$3.28m as well as receivables valued at US$162.3k due within 12 months. So its liabilities total US$781.4k more than the combination of its cash and short-term receivables.

Having regard to Safety Shot's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$48.7m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Safety Shot also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Safety Shot 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.

While it hasn't made a profit, at least Safety Shot booked its first revenue as a publicly listed company, in the last twelve months.

So How Risky Is Safety Shot?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Safety Shot had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$22m of cash and made a loss of US$37m. Given it only has net cash of US$998.2k, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 6 warning signs for Safety Shot (of which 3 are a bit concerning!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.