Green Thumb Industries (CSE:GTII) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Green Thumb Industries Inc. (CSE:GTII) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Green Thumb Industries

How Much Debt Does Green Thumb Industries Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Green Thumb Industries had US$206.5m of debt, an increase on US$97.1m, over one year. But on the other hand it also has US$285.8m in cash, leading to a US$79.3m net cash position.

A Look At Green Thumb Industries' Liabilities

The latest balance sheet data shows that Green Thumb Industries had liabilities of US$165.3m due within a year, and liabilities of US$540.0m falling due after that. Offsetting these obligations, it had cash of US$285.8m as well as receivables valued at US$25.5m due within 12 months. So its liabilities total US$394.0m more than the combination of its cash and short-term receivables.

Given Green Thumb Industries has a market capitalization of US$4.72b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Green Thumb Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Green Thumb Industries grew its EBIT by 288% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Green Thumb Industries 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Green Thumb Industries has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Considering the last two years, Green Thumb Industries actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Green Thumb Industries has US$79.3m in net cash. And we liked the look of last year's 288% year-on-year EBIT growth. So we are not troubled with Green Thumb Industries's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Green Thumb Industries .

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.