Does Delta 9 Cannabis (TSE:DN) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Delta 9 Cannabis

How Much Debt Does Delta 9 Cannabis Carry?

As you can see below, at the end of June 2022, Delta 9 Cannabis had CA$55.7m of debt, up from CA$25.0m a year ago. Click the image for more detail. However, it also had CA$13.5m in cash, and so its net debt is CA$42.2m.

A Look At Delta 9 Cannabis' Liabilities

Zooming in on the latest balance sheet data, we can see that Delta 9 Cannabis had liabilities of CA$31.8m due within 12 months and liabilities of CA$54.0m due beyond that. Offsetting this, it had CA$13.5m in cash and CA$5.24m in receivables that were due within 12 months. So it has liabilities totalling CA$67.1m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CA$23.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Delta 9 Cannabis would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. 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 8.8%, to CA$62m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Delta 9 Cannabis had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$10.0m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized CA$8.4m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 5 warning signs we've spotted with Delta 9 Cannabis (including 2 which don't sit too well with us) .

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.

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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.