4Front Ventures (CSE:FFNT) Is Making Moderate Use Of Debt

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. As with many other companies 4Front Ventures Corp. (CSE:FFNT) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for 4Front Ventures

What Is 4Front Ventures's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 4Front Ventures had debt of US$98.9m, up from US$55.2m in one year. However, it does have US$6.03m in cash offsetting this, leading to net debt of about US$92.9m.

A Look At 4Front Ventures' Liabilities

Zooming in on the latest balance sheet data, we can see that 4Front Ventures had liabilities of US$63.4m due within 12 months and liabilities of US$202.2m due beyond that. Offsetting this, it had US$6.03m in cash and US$9.28m in receivables that were due within 12 months. So it has liabilities totalling US$250.2m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$311.8m, so it does suggest shareholders should keep an eye on 4Front Ventures' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if 4Front Ventures can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year 4Front Ventures wasn't profitable at an EBIT level, but managed to grow its revenue by 32%, to US$109m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, 4Front Ventures still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$18m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$5.3m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for 4Front Ventures (1 is significant) 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.