Yahoo Finance Does Ceres Global Ag (TSE:CRP) Have A Healthy Balance Sheet?
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.' 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. We can see that Ceres Global Ag Corp. (TSE:CRP) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Ceres Global Ag
What Is Ceres Global Ag's Debt?
As you can see below, at the end of March 2019, Ceres Global Ag had US$66.3m of debt, up from US$41.5m a year ago. Click the image for more detail. However, it also had US$3.18m in cash, and so its net debt is US$63.1m.
A Look At Ceres Global Ag's Liabilities
The latest balance sheet data shows that Ceres Global Ag had liabilities of US$73.7m due within a year, and liabilities of US$15.5m falling due after that. Offsetting these obligations, it had cash of US$3.18m as well as receivables valued at US$15.7m due within 12 months. So its liabilities total US$70.4m more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of US$100.5m, so it does suggest shareholders should keep an eye on Ceres Global Ag's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ceres Global Ag 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, Ceres Global Ag saw its revenue drop to US$396m, which is a fall of 7.9%. That's not what we would hope to see.
Caveat Emptor
Over the last twelve months Ceres Global Ag produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$2.6m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$30m of cash over the last year. So suffice it to say we consider the stock very risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Ceres Global Ag's profit, revenue, and operating cashflow have changed over the last few years.
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.
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