Does Big Rock Brewery (TSE:BR) Have A Healthy Balance Sheet?
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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Big Rock Brewery Inc. (TSE:BR) makes use of debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Big Rock Brewery
How Much Debt Does Big Rock Brewery Carry?
The image below, which you can click on for greater detail, shows that Big Rock Brewery had debt of CA$4.75m at the end of June 2019, a reduction from CA$6.19m over a year. On the flip side, it has CA$163.0k in cash leading to net debt of about CA$4.59m.
How Healthy Is Big Rock Brewery's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Big Rock Brewery had liabilities of CA$12.1m due within 12 months and liabilities of CA$6.43m due beyond that. On the other hand, it had cash of CA$163.0k and CA$3.78m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$14.6m.
This deficit isn't so bad because Big Rock Brewery is worth CA$39.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Big Rock Brewery's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Big Rock Brewery managed to grow its revenue by 2.6%, to CA$48m. 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 Big Rock Brewery produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CA$1.3m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CA$161k of cash over the last year. So suffice it to say we do consider the stock to be risky. 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 Big Rock Brewery insider transactions.
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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