Does Adastra Holdings (CSE:XTRX) Have A Healthy Balance Sheet?

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.' 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 note that Adastra Holdings Ltd. (CSE:XTRX) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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, 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 Adastra Holdings

What Is Adastra Holdings's Debt?

As you can see below, Adastra Holdings had CA$3.58m of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. However, it also had CA$347.2k in cash, and so its net debt is CA$3.23m.

A Look At Adastra Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Adastra Holdings had liabilities of CA$9.34m due within 12 months and liabilities of CA$992.5k due beyond that. Offsetting these obligations, it had cash of CA$347.2k as well as receivables valued at CA$4.16m due within 12 months. So its liabilities total CA$5.83m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Adastra Holdings has a market capitalization of CA$15.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Adastra Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Adastra Holdings reported revenue of CA$11m, which is a gain of 128%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Despite the top line growth, Adastra Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$3.1m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$748k of cash over the last year. So suffice it to say we do consider the stock to be 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. Be aware that Adastra Holdings is showing 3 warning signs in our investment analysis , and 2 of those are a bit concerning...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.