Does THC Biomed Intl (CSE:THC) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that THC Biomed Intl Ltd. (CSE:THC) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

View our latest analysis for THC Biomed Intl

What Is THC Biomed Intl's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of October 2021 THC Biomed Intl had CA$5.44m of debt, an increase on CA$3.94m, over one year. However, it does have CA$377.1k in cash offsetting this, leading to net debt of about CA$5.07m.

How Healthy Is THC Biomed Intl's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that THC Biomed Intl had liabilities of CA$5.04m due within 12 months and liabilities of CA$3.27m due beyond that. Offsetting these obligations, it had cash of CA$377.1k as well as receivables valued at CA$690.2k due within 12 months. So it has liabilities totalling CA$7.24m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since THC Biomed Intl has a market capitalization of CA$16.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine THC Biomed Intl's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, THC Biomed Intl reported revenue of CA$4.3m, which is a gain of 14%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, THC Biomed Intl had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CA$5.6m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$1.5m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example THC Biomed Intl has 4 warning signs (and 1 which is a bit concerning) we think you should know about.

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.