Does TransCanna Holdings (CSE:TCAN) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that TransCanna Holdings Inc. (CSE:TCAN) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for TransCanna Holdings

How Much Debt Does TransCanna Holdings Carry?

As you can see below, at the end of May 2021, TransCanna Holdings had CA$14.8m of debt, up from CA$13.4m a year ago. Click the image for more detail. However, it does have CA$4.06m in cash offsetting this, leading to net debt of about CA$10.7m.

How Strong Is TransCanna Holdings' Balance Sheet?

We can see from the most recent balance sheet that TransCanna Holdings had liabilities of CA$4.32m falling due within a year, and liabilities of CA$14.6m due beyond that. Offsetting this, it had CA$4.06m in cash and CA$409.6k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$14.5m.

TransCanna Holdings has a market capitalization of CA$38.4m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is TransCanna Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, TransCanna Holdings made a loss at the EBIT level, and saw its revenue drop to CA$3.6m, which is a fall of 21%. To be frank that doesn't bode well.

Caveat Emptor

Not only did TransCanna Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CA$9.0m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$6.0m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that TransCanna Holdings is showing 6 warning signs in our investment analysis , and 2 of those shouldn't be ignored...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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