Cadiz (NASDAQ:CDZI) makes moderate use of debt

Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We note that Cadiz Inc. (NASDAQ:CDZI) has debt on its balance sheet. But the real question is whether this debt makes the business risky.

What risk does debt carry?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

What is Cadiz’s debt?

As you can see below, Cadiz had a debt of US$47.7 million in June 2022, compared to US$82.5 million the previous year. However, he also had $13.2 million in cash, so his net debt is $34.4 million.

NasdaqGM: CDZI Debt to Equity September 28, 2022

How healthy is Cadiz’ balance sheet?

Zooming in on the latest balance sheet data, we can see that Cadiz had liabilities of US$3.59 million due within 12 months and liabilities of US$71.3 million due beyond. In compensation for these obligations, it had cash of US$13.2 million as well as receivables valued at US$154.0 k maturing within 12 months. Thus, its liabilities total $61.4 million more than the combination of its cash and short-term receivables.

Cadiz has a market capitalization of $111.7 million, so it could very likely raise funds to improve its balance sheet, should the need arise. However, it is always worth taking a close look at its ability to repay debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Cadiz’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecasts.

Last year, Cadiz was not profitable at EBIT level, but managed to increase its turnover by 9.5%, to 612,000 USD. This rate of growth is a bit slow for our liking, but it takes all types to make a world.

Caveat Emptor

Importantly, Cadiz has recorded a loss in earnings before interest and taxes (EBIT) over the past year. Indeed, it lost a very significant US$15 million in EBIT. Considering that alongside the liabilities mentioned above, this doesn’t give us much confidence that the company should use so much debt. Quite frankly, we think the track record falls short, although it could improve over time. However, it doesn’t help that he’s burned through $21 million in cash in the past year. In short, it’s a really risky title. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. To do this, you need to find out about the 5 warning signs we spotted with Cadiz (including 2 that are potentially serious) .

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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