We Think THC Biomed Intl (CSE:THC) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, THC Biomed Intl Ltd. (CSE:THC) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 at October 2021 THC Biomed Intl had debt of CA$5.44m, up from CA$3.94m in one year. However, because it has a cash reserve of CA$377.1k, its net debt is less, at about CA$5.07m.

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$5.04m falling due within a year, and liabilities of CA$3.27m due beyond that. On the other hand, it had cash of CA$377.1k and CA$690.2k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$7.24m.

THC Biomed Intl has a market capitalization of CA$13.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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$3.0m, which is a gain of 12%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$1.5m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for THC Biomed Intl you should be aware of, and 1 of them makes us a bit uncomfortable.

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.