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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies VIVO Cannabis Inc. (TSE:VIVO) makes use of debt. But is this debt a concern to shareholders?
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 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is VIVO Cannabis's Net Debt?
The image below, which you can click on for greater detail, shows that VIVO Cannabis had debt of CA$4.67m at the end of September 2021, a reduction from CA$5.08m over a year. But on the other hand it also has CA$12.8m in cash, leading to a CA$8.17m net cash position.
How Healthy Is VIVO Cannabis' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that VIVO Cannabis had liabilities of CA$4.95m due within 12 months and liabilities of CA$46.9m due beyond that. Offsetting this, it had CA$12.8m in cash and CA$3.80m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$35.2m.
When you consider that this deficiency exceeds the company's CA$26.0m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. VIVO Cannabis boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since VIVO Cannabis will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, VIVO Cannabis made a loss at the EBIT level, and saw its revenue drop to CA$24m, which is a fall of 30%. To be frank that doesn't bode well.
So How Risky Is VIVO Cannabis?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year VIVO Cannabis had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$7.0m of cash and made a loss of CA$45m. But at least it has CA$8.17m on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 5 warning signs for VIVO Cannabis (2 are 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.