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. We note that New Age Beverages Corporation (NASDAQ:NBEV) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is New Age Beverages's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 New Age Beverages had US$24.2m of debt, an increase on US$9.42m, over one year. However, its balance sheet shows it holds US$83.6m in cash, so it actually has US$59.4m net cash.
A Look At New Age Beverages's Liabilities
The latest balance sheet data shows that New Age Beverages had liabilities of US$88.2m due within a year, and liabilities of US$85.7m falling due after that. On the other hand, it had cash of US$83.6m and US$15.8m worth of receivables due within a year. So it has liabilities totalling US$74.5m more than its cash and near-term receivables, combined.
New Age Beverages has a market capitalization of US$276.7m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, New Age Beverages also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if New Age Beverages 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.
Over 12 months, New Age Beverages reported revenue of US$152m, which is a gain of 197%. So there's no doubt that shareholders are cheering for growth
So How Risky Is New Age Beverages?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months New Age Beverages lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$15m and booked a US$19m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$84m. That means it could keep spending at its current rate for more than five years. The good news for shareholders is that New Age Beverages has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting New Age Beverages insider transactions.
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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.