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Is Goodfood Market (TSE:FOOD) Using Debt In A Risky Way?

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. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Goodfood Market Corp. (TSE:FOOD) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Goodfood Market

What Is Goodfood Market's Debt?

You can click the graphic below for the historical numbers, but it shows that as of February 2020 Goodfood Market had CA$45.5m of debt, an increase on CA$7.51m, over one year. However, it does have CA$67.0m in cash offsetting this, leading to net cash of CA$21.5m.

TSX:FOOD Historical Debt July 10th 2020
TSX:FOOD Historical Debt July 10th 2020

A Look At Goodfood Market's Liabilities

According to the last reported balance sheet, Goodfood Market had liabilities of CA$47.8m due within 12 months, and liabilities of CA$56.6m due beyond 12 months. On the other hand, it had cash of CA$67.0m and CA$2.38m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$35.0m.

Since publicly traded Goodfood Market shares are worth a total of CA$351.0m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Goodfood Market 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 ultimately the future profitability of the business will decide if Goodfood Market can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Goodfood Market reported revenue of CA$210m, which is a gain of 91%, 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 Goodfood Market?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Goodfood Market had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of CA$12m and booked a CA$18m accounting loss. But the saving grace is the CA$21.5m on the balance sheet. That means it could keep spending at its current rate for more than two years. Goodfood Market'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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Goodfood Market has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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. 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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