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. We can see that TILT Holdings Inc. (CSE:TILT) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is TILT Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2021 TILT Holdings had US$75.1m of debt, an increase on US$65.2m, over one year. On the flip side, it has US$8.96m in cash leading to net debt of about US$66.1m.
How Healthy Is TILT Holdings' Balance Sheet?
We can see from the most recent balance sheet that TILT Holdings had liabilities of US$41.9m falling due within a year, and liabilities of US$102.7m due beyond that. Offsetting these obligations, it had cash of US$8.96m as well as receivables valued at US$16.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$119.6m.
This is a mountain of leverage relative to its market capitalization of US$163.1m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine TILT Holdings'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, TILT Holdings reported revenue of US$165m, which is a gain of 7.4%, 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.
Importantly, TILT Holdings had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$24m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of US$57m into a profit. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that TILT Holdings is showing 2 warning signs in our investment analysis , 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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