Health Check: How Prudently Does IM Cannabis (CSE:IMCC) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that IM Cannabis Corp. (CSE:IMCC) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 IM Cannabis

What Is IM Cannabis's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 IM Cannabis had CA$6.18m of debt, an increase on none, over one year. But on the other hand it also has CA$18.1m in cash, leading to a CA$12.0m net cash position.

How Healthy Is IM Cannabis' Balance Sheet?

We can see from the most recent balance sheet that IM Cannabis had liabilities of CA$33.7m falling due within a year, and liabilities of CA$30.7m due beyond that. Offsetting this, it had CA$18.1m in cash and CA$29.2m in receivables that were due within 12 months. So its liabilities total CA$17.1m more than the combination of its cash and short-term receivables.

Since publicly traded IM Cannabis shares are worth a total of CA$315.0m, it seems unlikely that this level of liabilities would be a major 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, IM Cannabis boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine IM Cannabis'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.

Over 12 months, IM Cannabis reported revenue of CA$39m, which is a gain of 191%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

So How Risky Is IM Cannabis?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that IM Cannabis had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CA$44m and booked a CA$24m accounting loss. But at least it has CA$12.0m on the balance sheet to spend on growth, near-term. The good news for shareholders is that IM Cannabis has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example IM Cannabis has 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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.