Is THC Biomed Intl (CSE:THC) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that THC Biomed Intl Ltd. (CSE:THC) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 THC Biomed Intl

How Much Debt Does THC Biomed Intl Carry?

As you can see below, THC Biomed Intl had CA$4.35m of debt, at April 2022, which is about the same as the year before. You can click the chart for greater detail. However, it also had CA$1.16m in cash, and so its net debt is CA$3.19m.

How Strong Is THC Biomed Intl's Balance Sheet?

We can see from the most recent balance sheet that THC Biomed Intl had liabilities of CA$5.72m falling due within a year, and liabilities of CA$1.93m due beyond that. Offsetting this, it had CA$1.16m in cash and CA$444.6k in receivables that were due within 12 months. So its liabilities total CA$6.05m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CA$7.38m, so it does suggest shareholders should keep an eye on THC Biomed Intl's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is THC Biomed Intl'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.

In the last year THC Biomed Intl had a loss before interest and tax, and actually shrunk its revenue by 8.0%, to CA$2.5m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months THC Biomed Intl produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$3.7m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$1.8m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. To that end, you should learn about the 4 warning signs we've spotted with THC Biomed Intl (including 3 which are a bit unpleasant) .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.