MTL Cannabis (CSE:MTLC) Has A Pretty Healthy Balance Sheet

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.' 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. Importantly, MTL Cannabis Corp. (CSE:MTLC) does carry debt. But is this debt a concern to shareholders?

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What Risk Does Debt Bring?

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 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is MTL Cannabis's Debt?

You can click the graphic below for the historical numbers, but it shows that MTL Cannabis had CA$21.5m of debt in December 2024, down from CA$24.6m, one year before. However, because it has a cash reserve of CA$3.49m, its net debt is less, at about CA$18.0m.

How Strong Is MTL Cannabis' Balance Sheet?

We can see from the most recent balance sheet that MTL Cannabis had liabilities of CA$43.7m falling due within a year, and liabilities of CA$20.3m due beyond that. Offsetting this, it had CA$3.49m in cash and CA$10.6m in receivables that were due within 12 months. So it has liabilities totalling CA$49.9m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's CA$38.0m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.

See our latest analysis for MTL Cannabis

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Given net debt is only 1.5 times EBITDA, it is initially surprising to see that MTL Cannabis's EBIT has low interest coverage of 1.4 times. So one way or the other, it's clear the debt levels are not trivial. Pleasingly, MTL Cannabis is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 142% gain in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is MTL Cannabis'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last two years, MTL Cannabis actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

Both MTL Cannabis's ability to to convert EBIT to free cash flow and its EBIT growth rate gave us comfort that it can handle its debt. But truth be told its interest cover had us nibbling our nails. Looking at all this data makes us feel a little cautious about MTL Cannabis's debt levels. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. 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 MTL Cannabis has 4 warning signs (and 1 which is concerning) we think you should know about.

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.