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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.’ 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. Cannabis One Holdings Inc. (CNSX:CBIS) makes use of debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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.
What Is Cannabis One Holdings’s Net Debt?
As you can see below, at the end of September 2018, Cannabis One Holdings had US$300.0k of debt, up from none a year ago. Click the image for more detail. However, it also had US$69.0k in cash, and so its net debt is US$231.0k.
A Look At Cannabis One Holdings’s Liabilities
Zooming in on the latest balance sheet data, we can see that Cannabis One Holdings had liabilities of US$724.4k due within 12 months and no liabilities due beyond that. Offsetting these obligations, it had cash of US$69.0k as well as receivables valued at US$1.24m due within 12 months. So it can boast US$586.4k more liquid assets than total liabilities.
This state of affairs indicates that Cannabis One Holdings’s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it’s very unlikely that the US$53.7m company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, Cannabis One Holdings has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But it is Cannabis One 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, Cannabis One Holdings saw its revenue hold pretty steady. While that hardly impresses, its not too bad either.
Over the last twelve months Cannabis One Holdings produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$877k. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we’d be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. 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 Cannabis One Holdings insider transactions.
Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
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If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Thank you for reading.