Does Ayr Wellness (CSE:AYR.A) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Ayr Wellness Inc. (CSE:AYR.A) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Ayr Wellness

What Is Ayr Wellness's Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Ayr Wellness had debt of US$418.2m, up from US$194.7m in one year. However, because it has a cash reserve of US$78.7m, its net debt is less, at about US$339.6m.

How Healthy Is Ayr Wellness' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ayr Wellness had liabilities of US$96.7m due within 12 months and liabilities of US$712.5m due beyond that. Offsetting these obligations, it had cash of US$78.7m as well as receivables valued at US$7.79m due within 12 months. So its liabilities total US$722.7m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$392.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Ayr Wellness would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Ayr Wellness 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 Ayr Wellness wasn't profitable at an EBIT level, but managed to grow its revenue by 128%, to US$410m. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

While we can certainly appreciate Ayr Wellness's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at US$21m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through US$149m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Ayr Wellness has 3 warning signs we think you should be aware of.

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.

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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.