Is Christina Lake Cannabis (CSE:CLC) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Christina Lake Cannabis Corp. (CSE:CLC) does carry debt. But the real question is whether this debt is making the company risky.

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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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Christina Lake Cannabis Carry?

You can click the graphic below for the historical numbers, but it shows that Christina Lake Cannabis had CA$7.77m of debt in May 2025, down from CA$10.3m, one year before. On the flip side, it has CA$3.39m in cash leading to net debt of about CA$4.38m.

How Healthy Is Christina Lake Cannabis' Balance Sheet?

According to the last reported balance sheet, Christina Lake Cannabis had liabilities of CA$5.10m due within 12 months, and liabilities of CA$4.92m due beyond 12 months. Offsetting these obligations, it had cash of CA$3.39m as well as receivables valued at CA$1.67m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$4.96m.

While this might seem like a lot, it is not so bad since Christina Lake Cannabis has a market capitalization of CA$11.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

See our latest analysis for Christina Lake Cannabis

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

While Christina Lake Cannabis has a quite reasonable net debt to EBITDA multiple of 1.6, its interest cover seems weak, at 1.5. This does suggest the company is paying fairly high interest rates. In any case, it's safe to say the company has meaningful debt. We also note that Christina Lake Cannabis improved its EBIT from a last year's loss to a positive CA$2.5m. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Christina Lake Cannabis will need earnings to service that debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Happily for any shareholders, Christina Lake Cannabis actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

When it comes to the balance sheet, the standout positive for Christina Lake Cannabis was the fact that it seems able to convert EBIT to free cash flow confidently. But the other factors we noted above weren't so encouraging. To be specific, it seems about as good at covering its interest expense with its EBIT as wet socks are at keeping your feet warm. When we consider all the factors mentioned above, we do feel a bit cautious about Christina Lake Cannabis's use of debt. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. 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. We've identified 4 warning signs with Christina Lake Cannabis (at least 3 which make us uncomfortable) , and understanding them should be part of your investment process.

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.