Is THC Biomed Intl (CSE:THC) Weighed On By Its Debt Load?

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, THC Biomed Intl Ltd. (CSE:THC) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for THC Biomed Intl

What Is THC Biomed Intl's Debt?

The image below, which you can click on for greater detail, shows that THC Biomed Intl had debt of CA$4.24m at the end of October 2022, a reduction from CA$5.44m over a year. However, it also had CA$168.2k in cash, and so its net debt is CA$4.07m.

A Look At THC Biomed Intl's Liabilities

We can see from the most recent balance sheet that THC Biomed Intl had liabilities of CA$7.23m falling due within a year, and liabilities of CA$700.2k due beyond that. Offsetting these obligations, it had cash of CA$168.2k as well as receivables valued at CA$265.5k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$7.49m.

This deficit is considerable relative to its market capitalization of CA$8.20m, so it does suggest shareholders should keep an eye on THC Biomed Intl's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since THC Biomed Intl will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year THC Biomed Intl had a loss before interest and tax, and actually shrunk its revenue by 27%, to CA$2.2m. To be frank that doesn't bode well.

Caveat Emptor

While THC Biomed Intl's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CA$4.0m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CA$1.5m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for THC Biomed Intl (of which 3 shouldn't be ignored!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.