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. Importantly, Village Farms International, Inc. (TSE:VFF) does carry debt. But should shareholders be worried about its use of debt?
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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.
View our latest analysis for Village Farms International
How Much Debt Does Village Farms International Carry?
The image below, which you can click on for greater detail, shows that at June 2021 Village Farms International had debt of US$65.5m, up from US$34.7m in one year. However, its balance sheet shows it holds US$114.0m in cash, so it actually has US$48.6m net cash.
A Look At Village Farms International’s Liabilities
We can see from the most recent balance sheet that Village Farms International had liabilities of US$66.8m falling due within a year, and liabilities of US$77.1m due beyond that. Offsetting these obligations, it had cash of US$114.0m as well as receivables valued at US$42.1m due within 12 months. So it can boast US$12.3m more liquid assets than total liabilities.
This state of affairs indicates that Village Farms International’s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it’s hard to imagine that the US$723.3m company is struggling for cash, we still think it’s worth monitoring its balance sheet. Succinctly put, Village Farms International boasts net cash, so it’s fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Village Farms International can strengthen its balance sheet over time. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Village Farms International wasn’t profitable at an EBIT level, but managed to grow its revenue by 41%, to US$213m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Village Farms International?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Village Farms International lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$26m of cash and made a loss of US$4.4m. Given it only has net cash of US$48.6m, the company may need to raise more capital if it doesn’t reach break-even soon. Village Farms International’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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet – far from it. For instance, we’ve identified 1 warning sign for Village Farms International that 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.
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