Is Ayr Wellness (CSE:AYR.A) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Ayr Wellness Inc. (CSE:AYR.A) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

View our latest analysis for Ayr Wellness

How Much Debt Does Ayr Wellness Carry?

The chart below, which you can click on for greater detail, shows that Ayr Wellness had US$469.6m in debt in June 2023; about the same as the year before. However, because it has a cash reserve of US$60.0m, its net debt is less, at about US$409.5m.

How Healthy Is Ayr Wellness' Balance Sheet?

We can see from the most recent balance sheet that Ayr Wellness had liabilities of US$225.2m falling due within a year, and liabilities of US$629.5m due beyond that. Offsetting this, it had US$60.0m in cash and US$8.69m in receivables that were due within 12 months. So it has liabilities totalling US$786.0m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$142.6m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Ayr Wellness would likely require a major re-capitalisation if it had to pay its creditors today. 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 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 23%, to US$502m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Ayr Wellness managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping US$67m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized US$40m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Ayr Wellness (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.