David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Aurora Cannabis Inc. (TSE:ACB) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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, 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Aurora Cannabis's Debt?
As you can see below, Aurora Cannabis had CA$407.1m of debt at March 2021, down from CA$496.3m a year prior. But on the other hand it also has CA$476.9m in cash, leading to a CA$69.8m net cash position.
A Look At Aurora Cannabis' Liabilities
We can see from the most recent balance sheet that Aurora Cannabis had liabilities of CA$131.7m falling due within a year, and liabilities of CA$525.6m due beyond that. On the other hand, it had cash of CA$476.9m and CA$73.4m worth of receivables due within a year. So it has liabilities totalling CA$106.9m more than its cash and near-term receivables, combined.
Given Aurora Cannabis has a market capitalization of CA$2.12b, 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. While it does have liabilities worth noting, Aurora Cannabis also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Aurora Cannabis can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Aurora Cannabis had a loss before interest and tax, and actually shrunk its revenue by 11%, to CA$267m. That's not what we would hope to see.
So How Risky Is Aurora Cannabis?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Aurora Cannabis lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$359m and booked a CA$2.4b accounting loss. With only CA$69.8m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Aurora Cannabis (of which 1 is concerning!) you should know about.
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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