Does Auxly Cannabis Group (TSE:XLY) 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.' 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. Importantly, Auxly Cannabis Group Inc. (TSE:XLY) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Auxly Cannabis Group

How Much Debt Does Auxly Cannabis Group Carry?

The image below, which you can click on for greater detail, shows that Auxly Cannabis Group had debt of CA$142.7m at the end of December 2023, a reduction from CA$174.5m over a year. However, it also had CA$15.8m in cash, and so its net debt is CA$127.0m.

How Strong Is Auxly Cannabis Group's Balance Sheet?

We can see from the most recent balance sheet that Auxly Cannabis Group had liabilities of CA$107.0m falling due within a year, and liabilities of CA$103.9m due beyond that. Offsetting these obligations, it had cash of CA$15.8m as well as receivables valued at CA$16.7m due within 12 months. So its liabilities total CA$178.4m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CA$68.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Auxly Cannabis Group would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Auxly Cannabis Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Auxly Cannabis Group reported revenue of CA$101m, which is a gain of 7.0%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Auxly Cannabis Group produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$26m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost CA$45m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Auxly Cannabis Group (of which 1 shouldn't be ignored!) you should know about.

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.