Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Delta 9 Cannabis Inc. (TSE:DN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Delta 9 Cannabis
What Is Delta 9 Cannabis's Debt?
As you can see below, at the end of June 2021, Delta 9 Cannabis had CA$25.0m of debt, up from CA$22.1m a year ago. Click the image for more detail. However, it also had CA$5.47m in cash, and so its net debt is CA$19.6m.
A Look At Delta 9 Cannabis' Liabilities
According to the last reported balance sheet, Delta 9 Cannabis had liabilities of CA$17.0m due within 12 months, and liabilities of CA$27.4m due beyond 12 months. Offsetting this, it had CA$5.47m in cash and CA$5.25m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$33.7m.
This deficit is considerable relative to its market capitalization of CA$46.2m, so it does suggest shareholders should keep an eye on Delta 9 Cannabis' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Delta 9 Cannabis's ability to maintain a healthy balance sheet going forward. 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 Delta 9 Cannabis wasn't profitable at an EBIT level, but managed to grow its revenue by 36%, to CA$57m. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Even though Delta 9 Cannabis managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping CA$8.6m. 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$6.2m of cash over the last year. So suffice it to say we consider the stock very 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. For instance, we've identified 4 warning signs for Delta 9 Cannabis (1 is a bit concerning) you should be aware of.
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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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.
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About TSX:DN
Moderate and good value.
