David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Goodfood Market Corp. (TSE:FOOD) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.
What Is Goodfood Market's Net Debt?
The image below, which you can click on for greater detail, shows that at May 2019 Goodfood Market had debt of CA$10.0m, up from CA$2.73m in one year. But on the other hand it also has CA$49.7m in cash, leading to a CA$39.7m net cash position.
How Healthy Is Goodfood Market's Balance Sheet?
The latest balance sheet data shows that Goodfood Market had liabilities of CA$35.3m due within a year, and liabilities of CA$21.0m falling due after that. Offsetting these obligations, it had cash of CA$49.7m as well as receivables valued at CA$2.32m due within 12 months. So its liabilities total CA$4.25m more than the combination of its cash and short-term receivables.
Of course, Goodfood Market has a market capitalization of CA$171.5m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Goodfood Market boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Goodfood Market 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, Goodfood Market reported revenue of CA$137m, which is a gain of 143%. So there's no doubt that shareholders are cheering for growth
So How Risky Is Goodfood Market?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Goodfood Market lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$538k of cash and made a loss of CA$18m. But the saving grace is the CA$50m on the balance sheet. That means it could keep spending at its current rate for more than five years. Importantly, Goodfood Market's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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 Goodfood Market insider transactions.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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