Is Planet 13 Holdings (CSE:PLTH) Using Debt Sensibly?

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 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. Importantly, Planet 13 Holdings Inc. (CSE:PLTH) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Planet 13 Holdings

How Much Debt Does Planet 13 Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Planet 13 Holdings had US$10.3m of debt, an increase on US$884.0k, over one year. However, it does have US$27.4m in cash offsetting this, leading to net cash of US$17.1m.

How Strong Is Planet 13 Holdings' Balance Sheet?

We can see from the most recent balance sheet that Planet 13 Holdings had liabilities of US$42.6m falling due within a year, and liabilities of US$49.7m due beyond that. Offsetting this, it had US$27.4m in cash and US$1.29m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$63.6m.

Planet 13 Holdings has a market capitalization of US$106.7m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Planet 13 Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Planet 13 Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Planet 13 Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 8.7%, to US$109m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Planet 13 Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Planet 13 Holdings had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$6.9m and booked a US$36m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$17.1m. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Planet 13 Holdings , and understanding them should be part of your investment process.

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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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.