These 4 Measures Indicate That Green Thumb Industries (CSE:GTII) Is Using Debt Reasonably Well

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.' 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 Green Thumb Industries Inc. (CSE:GTII) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Green Thumb Industries

What Is Green Thumb Industries's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Green Thumb Industries had debt of US$197.6m, up from US$95.2m in one year. But it also has US$359.2m in cash to offset that, meaning it has US$161.6m net cash.

How Strong Is Green Thumb Industries' Balance Sheet?

The latest balance sheet data shows that Green Thumb Industries had liabilities of US$105.4m due within a year, and liabilities of US$458.1m falling due after that. Offsetting this, it had US$359.2m in cash and US$24.7m in receivables that were due within 12 months. So it has liabilities totalling US$179.6m more than its cash and near-term receivables, combined.

Of course, Green Thumb Industries has a market capitalization of US$6.04b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Green Thumb Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Green Thumb Industries grew its EBIT by 957% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Green Thumb Industries'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last two years, Green Thumb Industries recorded negative free cash flow, in total. 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$161.6m in net cash. And we liked the look of last year's 957% year-on-year EBIT growth. So we are not troubled with Green Thumb Industries's debt use. 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. For instance, we've identified 2 warning signs for Green Thumb Industries that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.
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