Warren Buffett famously said, '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. We note that Auxly Cannabis Group Inc. (TSE:XLY) does have debt on its balance sheet. 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. 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. 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 examine debt levels, we first consider both cash and debt levels, together.
What Is Auxly Cannabis Group's Debt?
The image below, which you can click on for greater detail, shows that at March 2022 Auxly Cannabis Group had debt of CA$175.6m, up from CA$116.9m in one year. However, it does have CA$16.4m in cash offsetting this, leading to net debt of about CA$159.1m.
How Healthy Is Auxly Cannabis Group's Balance Sheet?
We can see from the most recent balance sheet that Auxly Cannabis Group had liabilities of CA$51.4m falling due within a year, and liabilities of CA$192.4m due beyond that. On the other hand, it had cash of CA$16.4m and CA$28.1m worth of receivables due within a year. So it has liabilities totalling CA$199.3m more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the CA$77.1m 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. When analysing debt levels, the balance sheet is the obvious place to start. 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 reported revenue of CA$97m, which is a gain of 112%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!
While we can certainly appreciate Auxly Cannabis Group's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping CA$43m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through CA$38m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. Be aware that Auxly Cannabis Group is showing 3 warning signs in our investment analysis , you should know about...
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.