The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, National Access Cannabis Corp. (CVE:META) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for National Access Cannabis
How Much Debt Does National Access Cannabis Carry?
You can click the graphic below for the historical numbers, but it shows that as of May 2019 National Access Cannabis had CA$25.9m of debt, an increase on , over one year. However, because it has a cash reserve of CA$8.18m, its net debt is less, at about CA$17.7m.
How Strong Is National Access Cannabis's Balance Sheet?
The latest balance sheet data shows that National Access Cannabis had liabilities of CA$23.2m due within a year, and liabilities of CA$27.9m falling due after that. On the other hand, it had cash of CA$8.18m and CA$1.53m worth of receivables due within a year. So its liabilities total CA$41.4m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because National Access Cannabis is worth CA$83.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is National Access Cannabis's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, National Access Cannabis reported revenue of CA$38m, which is a gain of 1935%. That's virtually the hole-in-one of revenue growth!
Caveat Emptor
Despite the top line growth, National Access Cannabis still had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost a very considerable CA$18m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$38m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting National Access Cannabis insider transactions.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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