Is CanadaBis Capital (CVE:CANB) Using Debt Sensibly?

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.' 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 CanadaBis Capital Inc. (CVE:CANB) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for CanadaBis Capital

What Is CanadaBis Capital's Net Debt?

The image below, which you can click on for greater detail, shows that at October 2021 CanadaBis Capital had debt of CA$8.68m, up from CA$6.95m in one year. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is CanadaBis Capital's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CanadaBis Capital had liabilities of CA$10.2m due within 12 months and liabilities of CA$1.30m due beyond that. On the other hand, it had cash of CA$19.8k and CA$922.9k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$10.5m.

The deficiency here weighs heavily on the CA$6.17m 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, CanadaBis Capital 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 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.

In the last year CanadaBis Capital wasn't profitable at an EBIT level, but managed to grow its revenue by 36%, to CA$7.5m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, CanadaBis Capital still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CA$1.8m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CA$1.2m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for CanadaBis Capital (3 are 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.