Is TILT Holdings (CSE:TILT) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that TILT Holdings Inc. (CSE:TILT) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for TILT Holdings

What Is TILT Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 TILT Holdings had US$66.9m of debt, an increase on US$37.5m, over one year. On the flip side, it has US$4.34m in cash leading to net debt of about US$62.6m.

How Healthy Is TILT Holdings' Balance Sheet?

The latest balance sheet data shows that TILT Holdings had liabilities of US$44.9m due within a year, and liabilities of US$109.5m falling due after that. Offsetting these obligations, it had cash of US$4.34m as well as receivables valued at US$20.8m due within 12 months. So its liabilities total US$129.3m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$201.3m, so it does suggest shareholders should keep an eye on TILT Holdings' 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 ultimately the future profitability of the business will decide if TILT Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year TILT Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 26%, to US$155m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though TILT Holdings managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at US$15m. 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 US$13m of cash over the last year. 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. For example, we've discovered 3 warning signs for TILT Holdings (1 is significant!) that you should be aware of before investing here.

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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