Is cbdMD (NYSEMKT:YCBD) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that cbdMD, Inc. (NYSEMKT:YCBD) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for cbdMD

What Is cbdMD's Debt?

As you can see below, at the end of June 2020, cbdMD had US$1.69m of debt, up from none a year ago. Click the image for more detail. However, it does have US$15.1m in cash offsetting this, leading to net cash of US$13.4m.

A Look At cbdMD's Liabilities

Zooming in on the latest balance sheet data, we can see that cbdMD had liabilities of US$4.39m due within 12 months and liabilities of US$23.3m due beyond that. On the other hand, it had cash of US$15.1m and US$715.2k worth of receivables due within a year. So its liabilities total US$12.0m more than the combination of its cash and short-term receivables.

Since publicly traded cbdMD shares are worth a total of US$137.0m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, cbdMD 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 ultimately the future profitability of the business will decide if cbdMD can strengthen its balance sheet over time. 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 cbdMD wasn't profitable at an EBIT level, but managed to grow its revenue by 411%, to US$40m. That's virtually the hole-in-one of revenue growth!

So How Risky Is cbdMD?

Although cbdMD had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of US$31m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. The good news for cbdMD shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that cbdMD is showing 4 warning signs in our investment analysis , and 3 of those are a bit unpleasant...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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