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Would Organto Foods (CVE:OGO) Might Be Better Off With Less Debt

Simply Wall St

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. We can see that Organto Foods Inc. (CVE:OGO) 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Organto Foods

How Much Debt Does Organto Foods Carry?

As you can see below, Organto Foods had CA$1.48m of debt at March 2019, down from CA$3.37m a year prior. However, it also had CA$53.0k in cash, and so its net debt is CA$1.43m.

TSXV:OGO Historical Debt, August 29th 2019

A Look At Organto Foods's Liabilities

Zooming in on the latest balance sheet data, we can see that Organto Foods had liabilities of CA$4.34m due within 12 months and no liabilities due beyond that. On the other hand, it had cash of CA$53.0k and CA$765.8k worth of receivables due within a year. So its liabilities total CA$3.52m more than the combination of its cash and short-term receivables.

Organto Foods has a market capitalization of CA$6.82m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Organto Foods will need earnings to service that debt. 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 Organto Foods managed to grow its revenue by 190%, to CA$1.7m. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Even though Organto Foods managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping CA$3.4m. 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. Another cause for caution is that is bled CA$3.3m in negative free cash flow over the last twelve months. So in short it's a really risky stock. For riskier companies like Organto Foods I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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.

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 editorial-team@simplywallst.com. 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.