We Think Adastra Holdings (CSE:XTRX) Has A Fair Chunk Of 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Adastra Holdings Ltd. (CSE:XTRX) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Adastra Holdings

What Is Adastra Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Adastra Holdings had debt of CA$3.58m, up from CA$2.49m in one year. However, because it has a cash reserve of CA$380.4k, its net debt is less, at about CA$3.20m.

How Healthy Is Adastra Holdings' Balance Sheet?

The latest balance sheet data shows that Adastra Holdings had liabilities of CA$6.82m due within a year, and liabilities of CA$979.7k falling due after that. Offsetting these obligations, it had cash of CA$380.4k as well as receivables valued at CA$2.57m due within 12 months. So it has liabilities totalling CA$4.85m more than its cash and near-term receivables, combined.

Of course, Adastra Holdings has a market capitalization of CA$28.0m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Adastra Holdings will need earnings to service that debt. 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 134%, to CA$9.1m. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Even though Adastra Holdings managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost CA$2.7m at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$1.3m of cash over the last year. So suffice it to say we do consider the stock to be 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. Case in point: We've spotted 3 warning signs for Adastra Holdings you should be aware of, and 2 of them shouldn't be ignored.

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.