Here's Why Adastra Holdings (CSE:XTRX) Can Afford Some 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.' 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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Adastra Holdings

How Much Debt Does Adastra Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Adastra Holdings had CA$3.56m of debt, an increase on CA$2.48m, over one year. However, because it has a cash reserve of CA$1.24m, its net debt is less, at about CA$2.32m.

How Healthy Is Adastra Holdings' Balance Sheet?

According to the last reported balance sheet, Adastra Holdings had liabilities of CA$5.38m due within 12 months, and liabilities of CA$84.2k due beyond 12 months. Offsetting these obligations, it had cash of CA$1.24m as well as receivables valued at CA$1.36m due within 12 months. So it has liabilities totalling CA$2.87m more than its cash and near-term receivables, combined.

Given Adastra Holdings has a market capitalization of CA$72.6m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year Adastra Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 289%, to CA$4.9m. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Despite the top line growth, Adastra Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CA$648k 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$2.2m of cash over the last year. So to be blunt we think it is 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 Adastra Holdings has 5 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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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.