Is Vireo Health International (CSE:VREO) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Vireo Health International, Inc. (CSE:VREO) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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.

View our latest analysis for Vireo Health International

What Is Vireo Health International's Debt?

As you can see below, Vireo Health International had US$1.94m of debt at September 2020, down from US$4.08m a year prior. But it also has US$16.3m in cash to offset that, meaning it has US$14.3m net cash.

How Strong Is Vireo Health International's Balance Sheet?

According to the last reported balance sheet, Vireo Health International had liabilities of US$20.7m due within 12 months, and liabilities of US$36.7m due beyond 12 months. Offsetting these obligations, it had cash of US$16.3m as well as receivables valued at US$4.37m due within 12 months. So its liabilities total US$36.7m more than the combination of its cash and short-term receivables.

Since publicly traded Vireo Health International shares are worth a total of US$352.9m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Vireo Health International boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Vireo Health International's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Vireo Health International wasn't profitable at an EBIT level, but managed to grow its revenue by 78%, to US$44m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Vireo Health International?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Vireo Health International had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$18m of cash and made a loss of US$51m. With only US$14.3m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Vireo Health International may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Vireo Health International (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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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