Auditors Have Doubts About CanadaBis Capital (CVE:CANB)

The harsh reality for CanadaBis Capital Inc. (CVE:CANB) shareholders is that its auditors, BDO LLP, expressed doubts about its ability to continue as a going concern, in its reported results to July 2022. It is therefore fair to assume that, based on those financials, the company should strengthen its balance sheet in the short term, perhaps by issuing shares.

If the company does have to issue more shares, potential investors will be sure to consider how desperate it is for capital. So shareholders should absolutely be taking a close look at how risky the balance sheet is. The biggest concern we would have is the company's debt, since its lenders might force the company into administration if it cannot repay them.

Check out our latest analysis for CanadaBis Capital

How Much Debt Does CanadaBis Capital Carry?

You can click the graphic below for the historical numbers, but it shows that CanadaBis Capital had CA$7.88m of debt in July 2022, down from CA$8.37m, one year before. Net debt is about the same, since the it doesn't have much cash.

How Strong Is CanadaBis Capital's Balance Sheet?

The latest balance sheet data shows that CanadaBis Capital had liabilities of CA$11.9m due within a year, and liabilities of CA$940.2k falling due after that. Offsetting this, it had CA$144.9k in cash and CA$2.14m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$10.6m.

This deficit casts a shadow over the CA$4.80m 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, CanadaBis Capital would probably need a major re-capitalization if its creditors were to demand repayment.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Weak interest cover of 2.1 times and a disturbingly high net debt to EBITDA ratio of 5.2 hit our confidence in CanadaBis Capital like a one-two punch to the gut. The debt burden here is substantial. One redeeming factor for CanadaBis Capital is that it turned last year's EBIT loss into a gain of CA$1.0m, over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since CanadaBis Capital will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, CanadaBis Capital saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, CanadaBis Capital's conversion of EBIT to free cash flow left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least its EBIT growth rate is not so bad. After considering the datapoints discussed, we think CanadaBis Capital has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. Some investors may be interested in buying high risk stocks at the right price, but we prefer to avoid a company after its auditor has expressed any uncertainty about its ability to continue as a going concern. We prefer to invest in companies that ensure the balance sheet remains healthier than that. 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. To that end, you should be aware of the 3 warning signs we've spotted with CanadaBis Capital .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.