Is Columbia Care (CSE:CCHW) Using Debt Sensibly?

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. We note that Columbia Care Inc. (CSE:CCHW) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Columbia Care

What Is Columbia Care's Net Debt?

As you can see below, at the end of June 2021, Columbia Care had US$141.2m of debt, up from US$43.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$148.8m in cash, so it actually has US$7.59m net cash.

How Healthy Is Columbia Care's Balance Sheet?

We can see from the most recent balance sheet that Columbia Care had liabilities of US$287.8m falling due within a year, and liabilities of US$583.4m due beyond that. Offsetting this, it had US$148.8m in cash and US$10.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$711.9m.

While this might seem like a lot, it is not so bad since Columbia Care has a market capitalization of US$1.42b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Columbia Care also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Columbia Care's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Columbia Care wasn't profitable at an EBIT level, but managed to grow its revenue by 213%, to US$313m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Columbia Care?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Columbia Care lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$74m and booked a US$92m accounting loss. With only US$7.59m on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that Columbia Care has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. Case in point: We've spotted 3 warning signs for Columbia Care you should be aware of.

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.

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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