Is Delta 9 Cannabis (TSE:DN) Using Too Much 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.' 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 Delta 9 Cannabis Inc. (TSE:DN) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Delta 9 Cannabis

How Much Debt Does Delta 9 Cannabis Carry?

You can click the graphic below for the historical numbers, but it shows that Delta 9 Cannabis had CA$46.0m of debt in June 2023, down from CA$55.7m, one year before. However, because it has a cash reserve of CA$2.96m, its net debt is less, at about CA$43.0m.

A Look At Delta 9 Cannabis' Liabilities

We can see from the most recent balance sheet that Delta 9 Cannabis had liabilities of CA$46.0m falling due within a year, and liabilities of CA$36.7m due beyond that. Offsetting these obligations, it had cash of CA$2.96m as well as receivables valued at CA$3.15m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$76.7m.

The deficiency here weighs heavily on the CA$9.11m 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. After all, Delta 9 Cannabis would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Delta 9 Cannabis can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Delta 9 Cannabis wasn't profitable at an EBIT level, but managed to grow its revenue by 9.8%, to CA$68m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Delta 9 Cannabis produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$19m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost CA$24m in the last year. So we think buying this stock is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Delta 9 Cannabis is showing 5 warning signs in our investment analysis , and 3 of those make us uncomfortable...

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.