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. 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 Rubicon Organics Inc. (CNSX:ROMJ) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Rubicon Organics's Debt?
As you can see below, at the end of June 2019, Rubicon Organics had CA$12.5m of debt, up from CA$4.27m a year ago. Click the image for more detail. However, it does have CA$2.48m in cash offsetting this, leading to net debt of about CA$10.1m.
A Look At Rubicon Organics's Liabilities
We can see from the most recent balance sheet that Rubicon Organics had liabilities of CA$2.78m falling due within a year, and liabilities of CA$12.6m due beyond that. Offsetting these obligations, it had cash of CA$2.48m as well as receivables valued at CA$1.51m due within 12 months. So it has liabilities totalling CA$11.4m more than its cash and near-term receivables, combined.
Given Rubicon Organics has a market capitalization of CA$79.9m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Rubicon Organics's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Rubicon Organics had negative earnings before interest and tax, and actually shrunk its revenue by 11%, to CA$1.2m. That's not what we would hope to see.
Not only did Rubicon Organics's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CA$14m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$19m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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 Rubicon Organics 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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