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. As with many other companies Greenlane Holdings, Inc. (NASDAQ:GNLN) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Greenlane Holdings’s Net Debt?
The image below, which you can click on for greater detail, shows that Greenlane Holdings had debt of US$8.23m at the end of September 2019, a reduction from US$8.74m over a year. But it also has US$52.5m in cash to offset that, meaning it has US$44.3m net cash.
A Look At Greenlane Holdings’s Liabilities
Zooming in on the latest balance sheet data, we can see that Greenlane Holdings had liabilities of US$22.2m due within 12 months and liabilities of US$12.4m due beyond that. Offsetting these obligations, it had cash of US$52.5m as well as receivables valued at US$7.59m due within 12 months. So it can boast US$25.5m more liquid assets than total liabilities.
This excess liquidity suggests that Greenlane Holdings is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don’t think it will have any issues with its lenders. Simply put, the fact that Greenlane Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Greenlane Holdings can strengthen its balance sheet over time. 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 Greenlane Holdings wasn’t profitable at an EBIT level, but managed to grow its revenue by26%, to US$199m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Greenlane Holdings?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Greenlane Holdings had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through US$54m of cash and made a loss of US$15m. With only US$44.3m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Greenlane Holdings may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. For riskier companies like Greenlane Holdings 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.
If you’re interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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.
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