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.' 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. We can see that SLANG Worldwide Inc. (CNSX:SLNG) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.
What Is SLANG Worldwide's Debt?
The image below, which you can click on for greater detail, shows that at March 2019 SLANG Worldwide had debt of CA$4.45m, up from none in one year. However, its balance sheet shows it holds CA$13.1m in cash, so it actually has CA$8.63m net cash.
How Strong Is SLANG Worldwide's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that SLANG Worldwide had liabilities of CA$13.2m due within 12 months and liabilities of CA$120.2m due beyond that. On the other hand, it had cash of CA$13.1m and CA$8.43m worth of receivables due within a year. So its liabilities total CA$111.9m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because SLANG Worldwide is worth CA$233.1m, and thus could probably raise enough capital to shore up 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, SLANG Worldwide also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 SLANG Worldwide 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.
While it hasn't made a profit, at least SLANG Worldwide booked its first revenue as a publicly listed company, in the last twelve months.
So How Risky Is SLANG Worldwide?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months SLANG Worldwide lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$14m and booked a CA$44m accounting loss. Given it only has net cash of CA$13m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, SLANG Worldwide'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 we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how SLANG Worldwide's profit, revenue, and operating cashflow have changed over the last few years.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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.