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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.’ 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 Cannara Biotech Inc. (CNSX:LOVE) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Cannara Biotech’s Net Debt?
As you can see below, Cannara Biotech had CA$12.5m of debt, at August 2018, which is about the same the year before. You can click the chart for greater detail. However, its balance sheet shows it holds CA$12.9m in cash, so it actually has CA$391.0k net cash.
How Strong Is Cannara Biotech’s Balance Sheet?
The latest balance sheet data shows that Cannara Biotech had liabilities of CA$1.16m due within a year, and liabilities of CA$13.0m falling due after that. On the other hand, it had cash of CA$12.9m and CA$585.0k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$633.2k.
This state of affairs indicates that Cannara Biotech’s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it’s hard to imagine that the CA$107.7m company is struggling for cash, we still think it’s worth monitoring its balance sheet. Cannara Biotech 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 you can’t view debt in total isolation; since Cannara Biotech will need earnings to service that debt. So if you’re keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Cannara Biotech saw its revenue hold pretty steady. While that’s not too bad, we’d prefer see growth.
So How Risky Is Cannara Biotech?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Cannara Biotech had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of CA$33m and booked a CA$4.2m accounting loss. Given it only has net cash of CA$13m, the company may need to raise more capital if it doesn’t reach break-even soon. Overall, we’d say the stock is a bit risky, and we’re usually very cautious until we see positive free cash flow. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Cannara Biotech insider transactions.
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.