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. We note that The Supreme Cannabis Company, Inc. (TSE:FIRE) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Supreme Cannabis Company Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 Supreme Cannabis Company had CA$75.5m of debt, an increase on CA$30.4m, over one year. On the flip side, it has CA$75.0m in cash leading to net debt of about CA$471.2k.
How Healthy Is Supreme Cannabis Company's Balance Sheet?
The latest balance sheet data shows that Supreme Cannabis Company had liabilities of CA$24.3m due within a year, and liabilities of CA$82.1m falling due after that. Offsetting these obligations, it had cash of CA$75.0m as well as receivables valued at CA$9.25m due within 12 months. So its liabilities total CA$22.1m more than the combination of its cash and short-term receivables.
Since publicly traded Supreme Cannabis Company shares are worth a total of CA$373.7m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, Supreme Cannabis Company has virtually no net debt, 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 it is future earnings, more than anything, that will determine Supreme Cannabis Company's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Supreme Cannabis Company managed to grow its revenue by 397%, to CA$26m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
Despite the top line growth, Supreme Cannabis Company still had negative earnings before interest and tax (EBIT), over the last year. To be specific the EBIT loss came in at CA$13m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CA$109m of cash over the last year. So in short it's a really risky stock. For riskier companies like Supreme Cannabis Company I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.