Is Wildflower Brands (CSE:SUN) A Risky Investment?
Simply Wall St
January 31, 2020
Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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. We note that Wildflower Brands Inc. (CSE:SUN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Wildflower Brands Carry?
The image below, which you can click on for greater detail, shows that Wildflower Brands had debt of CA$6.46m at the end of September 2019, a reduction from CA$8.73m over a year. However, because it has a cash reserve of CA$968.4k, its net debt is less, at about CA$5.49m.
How Strong Is Wildflower Brands’s Balance Sheet?
We can see from the most recent balance sheet that Wildflower Brands had liabilities of CA$7.61m falling due within a year, and liabilities of CA$12.5m due beyond that. Offsetting these obligations, it had cash of CA$968.4k as well as receivables valued at CA$414.2k due within 12 months. So it has liabilities totalling CA$18.7m more than its cash and near-term receivables, combined.
This deficit isn’t so bad because Wildflower Brands is worth CA$32.9m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it’s clear that we should definitely closely examine whether it can manage its debt without dilution. 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 Wildflower Brands 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, Wildflower Brands reported revenue of CA$12m, which is a gain of 439%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that’s like nailing the game winning 3-pointer!
Caveat Emptor
While we can certainly savour Wildflower Brands’s tasty revenue growth, its negative earnings before interest and tax (EBIT) leaves a bitter aftertaste. Its EBIT loss was a whopping CA$5.2m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$3.5m in negative free cash flow over the last twelve months. So in short it’s a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet.
