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

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. As with many other companies THC Biomed Intl Ltd. (CSE:THC) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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

What Is THC Biomed Intl's Net Debt?

You can click the graphic below for the historical numbers, but it shows that THC Biomed Intl had CA$4.34m of debt in January 2023, down from CA$5.61m, one year before. However, it also had CA$94.4k in cash, and so its net debt is CA$4.24m.

How Strong 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$7.67m due within 12 months and liabilities of CA$954.1k due beyond that. On the other hand, it had cash of CA$94.4k and CA$447.3k worth of receivables due within a year. So its liabilities total CA$8.08m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CA$4.92m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, THC Biomed Intl would probably need a major re-capitalization if its creditors were to demand repayment. 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 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 14%, to CA$2.4m. We would much prefer see growth.

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$3.4m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CA$1.1m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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, we've discovered 4 warning signs for THC Biomed Intl (3 are a bit unpleasant!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.