RE:Company DebtGoldbuggy1 wrote:
This doesn't seem to be a talked about much subject here for this company, but it should be, as for this company it is significant and plays an important role in company profits. As of March 8th, 2016, the Company Debt stood around $196 M. How much does this company pay on Interest Payments for that amount? It is difficult to determine exactly as there Credit Facility is complicated as is determined by how much debt they have as compared to earnings. But to give this a Ball Park Figure of 5%, which is lower than there Debenture Rate of 5.85%, would be a fare guess. So on $196 M in Debt they would pay about $9.8 M. Now consider this company made $1.13 / Share in Cash Flow last year, or about $31 M (call this Gross Income) then paying $9.8 M is Interest Payment Debt is quite a lot or about 32% of Gross Income. Subtract from this also what the company pays in Dividends of about $9.9 M and you can see how much this really is. So after taking these pieces away from the Pie what is left for the company to expand and grow with? Well, $31 M Gross Income less $9.8 M in Interest Payment Debts leaves $21.2 M. If Income Taxes are 25% (somewhere between 25% to 23% I think) then they have left $15.9 M. Subtract Dividend Payments of $9.9 M and now there is $6 M left. This does not include Adjustments to Earnings, like in this Q1 the company already announced a $0.7 M payment for Severance Pay for reducing Office Staff. Nor does this included the $2.5 M in store renovations or there need to increase there Working Capital as it is low right now. It also does not take into consideration in reduction in Same Store Sales or Gross Margins in the sluggish Alaskan and Alberta Markets. So Yes! With all things considered, this company should be able to keep up to there Debt Payments and Dividends. But on the other hand you can see that this huge debts is also tying there hands and feet together when it comes to growth as they basically have nothing left to do that with. So ideally, the only way this company can growth if not from SSS, is to reduce there Debt. But How? With only a few million left over each year it would take then over 20 years to pay off this debt. Even if they stopped paying a Dividend and used that $9.9 M just to pay down debt. By Debentures? The company already pays 4.5% in Dividends. If you were to buy an Unsecured Debenture you would want a better return than this. Otherwise you might as well stick with the Common Stock. Could they offer Debentures at the same rate as the last ones, and at 5.85%. Probably, but then we used a Ball Park Figure of paying a 5% Interest Rate on Debt now. So if you go beyond this 5% you would only be increasing your Debt Payment and not decreasing your amount of Debt. So they can't sell Debentures either. The Debt remains the same anyway. So really all they have left to sell is more shares. To pay off this $196 M in Debt the company would have to sell about 24.5 M Shares at $8. That is almost double to what it is right now. But at least then the company would be Financially Sound and to make that growth from Cash Flow which everyone here thinks they can do now. Which they can't! Of course the company could do nothing and sit back and hope for better days, but this is risky to. How long are Investors willing to hold and give this stock a P/E Ratio of 15, which they are doing now, and collect a 4.5% Dividend, when they notice that this company is not growing and will not grow for years? So then give this company a new P/E Ratio of 10 or less, and what it deserves with no growth plans as they are topped out in money and can't borrow more, and thus putting this Share Price down to at least $6. New Jersey should add another $1.3 M to the Cash Flow but is that enough to grow on? They still need another $19.5 M to buy the other 49% of New Jersey which I have no idea where they will get the money to do that. For 2016 I see the Alberta and Alaskan Economy getting worst. More Layoffs! More Delayed Projects! More people leaving Alberta and going back home after waiting a year and hoping to get there jobs back. More Alberta Liquor Stores closing. Even if Oil Price go up now it will take years before it effects more growth in Alberta and Alaska. From the Outside now and looking in, the best move this company can make now is to sell another 24.5 M Shares at $8 and pay off all debt. After all, the Sales would still be the same and the Cash Flow would also remain the same. Which is good for bonuses. But only the Cash Flow per share would drop and of course Earnings per Share and thus the Share Price. But worth taking on the chin now as at least then the company can grow from its own Cash Flow. With these new opportunities in the USA this company needs to do that
So what can this company do and how much can they grow with only $6 M left over? Again this $6 M does not include added adjustments to earnings, or renovations of older stores. In Q3 the company announce 2 new large-format store openings in Connecticut and Massachusetts for about $0.5 M each. I suppose that buys them the Liquor License, some Inventory, and some Equipment to operate these places. But to make a profit they will need to spend more. Much more! They will need to spend more on advertising and promote special sales (a discount to Gross Margins) to draw customers in. They will originally be over staffed adding to costs and in which all there staff will require training. This is why companies do not include new stores in there Same Store Sales. As it takes time to establish themselves and to start turning a profit. So since new stores don't generate a profit right away the only other way is to buy an established store. But how can they do that with less than $6 M a year and almost topped out on there credit facility and not much working capital? They still need to come up with $19.5 M to buy the remaining 49% left in this New Jersey Deal, which they haven't done so far. So how little is $6 M to this company? If Gross Margins dropped from presently 25.5% to 25.0% because the company had to sell at lower prices to be competitive this would wipe out $3.8 M. If cost were to go up without an increase in Same Store Sales, this could wipe out all of this $6 M and more. Of course the company can just sit there and hope for better days, but to be proactive the company has to increase the amount of money they have to spend for growth. To do that they either have to cut this Dividend, giving them and extra $9.9 M a year, or sell shares. In selling shares they may sell 24.5 M to pay off all debt and giving them an extra $9.8 M a year, or only 4 M, like they did last time, giving them about $32 M in which they can use part of that to pay this extra share dividends, and the rest for growth. Either option is going to be negative for this share price. If they sit and do nothing and stop growing, this could also turn into being very negative. If they cut the Dividend, this to is negative. If they sell more shares, again it is negative. This may not pop up its ugly head today, or tomorrow, or next month even. But sooner or later there will be a time to pay the Piper and the company will have to make drastic steps, and like they did last Quarter.