Is iAnthus Capital Holdings (CSE:IAN) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies iAnthus Capital Holdings, Inc. (CSE:IAN) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for iAnthus Capital Holdings

How Much Debt Does iAnthus Capital Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that iAnthus Capital Holdings had US$139.1m of debt in June 2022, down from US$190.4m, one year before. On the flip side, it has US$29.8m in cash leading to net debt of about US$109.3m.

How Healthy Is iAnthus Capital Holdings' Balance Sheet?

The latest balance sheet data shows that iAnthus Capital Holdings had liabilities of US$107.0m due within a year, and liabilities of US$186.3m falling due after that. On the other hand, it had cash of US$29.8m and US$3.01m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$260.5m.

This deficit is considerable relative to its market capitalization of US$385.0m, so it does suggest shareholders should keep an eye on iAnthus Capital Holdings' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is iAnthus Capital Holdings'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 iAnthus Capital Holdings had a loss before interest and tax, and actually shrunk its revenue by 4.9%, to US$183m. That's not what we would hope to see.

Caveat Emptor

Importantly, iAnthus Capital Holdings had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$51m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$17m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that iAnthus Capital Holdings is showing 3 warning signs in our investment analysis , you should know about...

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.