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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.' 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 NewAge, Inc. (NASDAQ:NBEV) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does NewAge Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2021 NewAge had US$31.5m of debt, an increase on US$20.3m, over one year. But it also has US$80.9m in cash to offset that, meaning it has US$49.4m net cash.
How Strong Is NewAge's Balance Sheet?
The latest balance sheet data shows that NewAge had liabilities of US$107.4m due within a year, and liabilities of US$122.4m falling due after that. Offsetting these obligations, it had cash of US$80.9m as well as receivables valued at US$10.5m due within 12 months. So it has liabilities totalling US$138.5m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since NewAge has a market capitalization of US$268.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, NewAge 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 it is future earnings, more than anything, that will determine NewAge's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, NewAge reported revenue of US$403m, which is a gain of 58%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is NewAge?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that NewAge had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$17m and booked a US$19m accounting loss. With only US$49.4m on the balance sheet, it would appear that its going to need to raise capital again soon. NewAge's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for NewAge that you should be aware of.
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.
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.
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