Does Auxly Cannabis Group (TSE:XLY) Have A Healthy Balance Sheet?

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 Auxly Cannabis Group Inc. (TSE:XLY) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Auxly Cannabis Group

What Is Auxly Cannabis Group's Debt?

As you can see below, Auxly Cannabis Group had CA$174.2m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have CA$8.70m in cash offsetting this, leading to net debt of about CA$165.5m.

How Healthy Is Auxly Cannabis Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Auxly Cannabis Group had liabilities of CA$96.6m due within 12 months and liabilities of CA$153.2m due beyond that. Offsetting this, it had CA$8.70m in cash and CA$16.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$224.5m.

The deficiency here weighs heavily on the CA$20.2m 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, Auxly Cannabis Group would probably need a major re-capitalization if its creditors were to demand repayment. 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 Auxly Cannabis Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Auxly Cannabis Group made a loss at the EBIT level, and saw its revenue drop to CA$90m, which is a fall of 13%. That's not what we would hope to see.

Caveat Emptor

Not only did Auxly Cannabis Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CA$34m. 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. Sure, the company might have a nice story about how they are going on to a brighter future. But the fact is that it incinerated CA$7.6m of cash in the last twelve months, and has precious few liquid assets in comparison to its liabilities. So is this a high risk stock? We think so, and we'd avoid it. 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. For instance, we've identified 5 warning signs for Auxly Cannabis Group (3 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.