Here's Why Cadiz (NASDAQ:CDZI) Can Afford Some 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.' 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. Importantly, Cadiz Inc. (NASDAQ:CDZI) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Cadiz

How Much Debt Does Cadiz Carry?

As you can see below, Cadiz had US$36.8m of debt at March 2023, down from US$47.1m a year prior. However, it also had US$26.3m in cash, and so its net debt is US$10.5m.

How Healthy Is Cadiz's Balance Sheet?

According to the last reported balance sheet, Cadiz had liabilities of US$5.43m due within 12 months, and liabilities of US$61.3m due beyond 12 months. On the other hand, it had cash of US$26.3m and US$225.0k worth of receivables due within a year. So its liabilities total US$40.2m more than the combination of its cash and short-term receivables.

Given Cadiz has a market capitalization of US$298.3m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Cadiz 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.

In the last year Cadiz wasn't profitable at an EBIT level, but managed to grow its revenue by 163%, to US$1.5m. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

While we can certainly appreciate Cadiz's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost US$17m 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. However, it doesn't help that it burned through US$24m of cash over the last year. So in short it's a really risky stock. 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. For example, we've discovered 3 warning signs for Cadiz that you should be aware of before investing here.

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.