Warren Buffett once said, ‘Volatility is far from synonymous with risk.’ This statement holds true when considering the importance of debt in assessing the risk of a company. Village Farms International, Inc. (NASDAQ:VFF) is a company that utilizes debt in its operations, raising the question of how much risk this debt creates.
Debt becomes a problem for a business when it struggles to meet its obligations, either through free cash flow or by raising capital at a reasonable cost. If a company cannot repay its debt, shareholders may end up with nothing. In some cases, companies may need to dilute shareholders at a low share price to manage their debt. However, debt can also be a valuable tool for companies seeking capital for growth opportunities.
Village Farms International had $50.1m in debt as of March 2024, with $26.7m in cash, resulting in net debt of approximately $23.4m. The company also had liabilities of $72.7m due within a year and $73.3m due beyond that, exceeding its cash and short-term receivables. This high level of leverage in comparison to its market capitalization of $119.1m suggests potential dilution for shareholders if the company needs to strengthen its balance sheet quickly.
While Village Farms International saw revenue growth of 3.8% to $299m in the last year, it reported an EBIT loss of $12m. This, combined with its high debt levels, raises concerns about the company’s financial health. It is important for investors to consider the risks associated with debt when analyzing a company’s balance sheet.
In conclusion, Village Farms International’s reliance on debt poses risks for investors. While the company may improve its balance sheet over time, its current financial situation suggests a level of risk that investors should be aware of. It is crucial to conduct thorough analysis before investing in companies with high debt levels.