Would THC Biomed Intl (CSE:THC) Be Better Off With Less Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, THC Biomed Intl Ltd. (CSE:THC) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for THC Biomed Intl

What Is THC Biomed Intl's Debt?

As you can see below, THC Biomed Intl had CA$3.94m of debt, at October 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have CA$232.1k in cash offsetting this, leading to net debt of about CA$3.71m.

How Healthy Is THC Biomed Intl's Balance Sheet?

The latest balance sheet data shows that THC Biomed Intl had liabilities of CA$5.45m due within a year, and liabilities of CA$1.37m falling due after that. On the other hand, it had cash of CA$232.1k and CA$401.0k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$6.19m.

THC Biomed Intl has a market capitalization of CA$17.2m, 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. 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.

Over 12 months, THC Biomed Intl reported revenue of CA$3.8m, which is a gain of 66%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate THC Biomed Intl's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CA$1.5m 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$673k of cash over the last year. So to be blunt we think it is 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. Take risks, for example - THC Biomed Intl has 6 warning signs (and 2 which are potentially serious) we think you should know about.

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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