Adastra Labs Holdings (CSE:XTRX) Is Making Moderate Use Of Debt

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 can see that Adastra Labs Holdings Ltd. (CSE:XTRX) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Adastra Labs Holdings

What Is Adastra Labs Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Adastra Labs Holdings had debt of CA$2.48m at the end of September 2020, a reduction from CA$4.75m over a year. However, it does have CA$2.31m in cash offsetting this, leading to net debt of about CA$169.1k.

How Strong Is Adastra Labs Holdings's Balance Sheet?

According to the last reported balance sheet, Adastra Labs Holdings had liabilities of CA$3.80m due within 12 months, and liabilities of CA$40.0k due beyond 12 months. Offsetting these obligations, it had cash of CA$2.31m as well as receivables valued at CA$112.8k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$1.42m.

Since publicly traded Adastra Labs Holdings shares are worth a total of CA$48.8m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, Adastra Labs Holdings has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Adastra Labs 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.

While it hasn't made a profit, at least Adastra Labs Holdings booked its first revenue as a publicly listed company, in the last twelve months.

Caveat Emptor

Over the last twelve months Adastra Labs Holdings produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$8.0m. 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$5.2m of cash over the last year. So suffice it to say we consider the stock very 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 Labs Holdings is showing 5 warning signs in our investment analysis , and 2 of those are significant...

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.

If you’re looking to trade Adastra Labs Holdings, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.