We Think Greenway Greenhouse Cannabis (CSE:GWAY) Has A Fair Chunk Of Debt

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.' 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, Greenway Greenhouse Cannabis Corporation (CSE:GWAY) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Greenway Greenhouse Cannabis

What Is Greenway Greenhouse Cannabis's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Greenway Greenhouse Cannabis had debt of CA$7.37m, up from CA$4.94m in one year. However, it also had CA$1.53m in cash, and so its net debt is CA$5.84m.

A Look At Greenway Greenhouse Cannabis' Liabilities

According to the last reported balance sheet, Greenway Greenhouse Cannabis had liabilities of CA$5.53m due within 12 months, and liabilities of CA$15.6m due beyond 12 months. Offsetting this, it had CA$1.53m in cash and CA$920.6k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$18.7m.

This is a mountain of leverage relative to its market capitalization of CA$28.9m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is Greenway Greenhouse Cannabis's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Greenway Greenhouse Cannabis had a loss before interest and tax, and actually shrunk its revenue by 7.0%, to CA$5.2m. We would much prefer see growth.

Caveat Emptor

Importantly, Greenway Greenhouse Cannabis had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$3.5m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$5.0m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. We've identified 4 warning signs with Greenway Greenhouse Cannabis (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com