Does HEXO (TSE:HEXO) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, HEXO Corp. (TSE:HEXO) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for HEXO

What Is HEXO's Net Debt?

You can click the graphic below for the historical numbers, but it shows that HEXO had CA$32.0m of debt in April 2021, down from CA$79.5m, one year before. But it also has CA$81.0m in cash to offset that, meaning it has CA$49.1m net cash.

A Look At HEXO's Liabilities

Zooming in on the latest balance sheet data, we can see that HEXO had liabilities of CA$69.7m due within 12 months and liabilities of CA$56.3m due beyond that. On the other hand, it had cash of CA$81.0m and CA$29.3m worth of receivables due within a year. So it has liabilities totalling CA$15.8m more than its cash and near-term receivables, combined.

Of course, HEXO has a market capitalization of CA$675.0m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, HEXO also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 HEXO'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.

Over 12 months, HEXO reported revenue of CA$112m, which is a gain of 62%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is HEXO?

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 HEXO lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$41m and booked a CA$214m accounting loss. Given it only has net cash of CA$49.1m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, HEXO may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. Case in point: We've spotted 2 warning signs for HEXO you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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