Is Organto Foods (CVE:OGO) Using Debt Sensibly?
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Organto Foods Inc. (CVE:OGO) does carry debt. 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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Organto Foods
What Is Organto Foods's Net Debt?
As you can see below, at the end of March 2022, Organto Foods had CA$8.73m of debt, up from CA$4.15m a year ago. Click the image for more detail. However, it does have CA$9.54m in cash offsetting this, leading to net cash of CA$809.1k.
How Healthy Is Organto Foods' Balance Sheet?
The latest balance sheet data shows that Organto Foods had liabilities of CA$7.65m due within a year, and liabilities of CA$5.83m falling due after that. Offsetting this, it had CA$9.54m in cash and CA$3.00m in receivables that were due within 12 months. So it has liabilities totalling CA$935.3k more than its cash and near-term receivables, combined.
Since publicly traded Organto Foods shares are worth a total of CA$25.4m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Organto Foods 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 you can't view debt in total isolation; since Organto Foods will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Organto Foods reported revenue of CA$22m, which is a gain of 49%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Organto Foods?
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 Organto Foods lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$6.6m and booked a CA$7.4m accounting loss. Given it only has net cash of CA$809.1k, the company may need to raise more capital if it doesn't reach break-even soon. Organto Foods'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. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Organto Foods you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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