Here's Why Cannara Biotech (CSE:LOVE) Can Afford Some Debt

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 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. We note that Cannara Biotech Inc. (CSE:LOVE) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Cannara Biotech

What Is Cannara Biotech's Net Debt?

The image below, which you can click on for greater detail, shows that at November 2020 Cannara Biotech had debt of CA$13.2m, up from CA$12.5m in one year. However, because it has a cash reserve of CA$4.07m, its net debt is less, at about CA$9.11m.

How Strong Is Cannara Biotech's Balance Sheet?

We can see from the most recent balance sheet that Cannara Biotech had liabilities of CA$2.76m falling due within a year, and liabilities of CA$13.8m due beyond that. Offsetting these obligations, it had cash of CA$4.07m as well as receivables valued at CA$399.9k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$12.1m.

Given Cannara Biotech has a market capitalization of CA$125.4m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Cannara Biotech's earnings that will influence how the balance sheet holds up in the future. 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 reported revenue of CA$3.4m, which is a gain of 60%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Cannara Biotech managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost CA$12m at the EBIT level. 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. However, it doesn't help that it burned through CA$14m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Cannara Biotech has 4 warning signs (and 1 which can't be ignored) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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