Is CanadaBis Capital (CVE:CANB) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that CanadaBis Capital Inc. (CVE:CANB) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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, 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

How Much Debt Does CanadaBis Capital Carry?

You can click the graphic below for the historical numbers, but it shows that as of January 2022 CanadaBis Capital had CA$7.80m of debt, an increase on CA$6.94m, over one year. And it doesn't have much cash, so its net debt is about the same.

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$10.6m due within 12 months and liabilities of CA$1.28m due beyond that. Offsetting these obligations, it had cash of CA$22.8k as well as receivables valued at CA$672.5k due within 12 months. So its liabilities total CA$11.1m more than the combination of its cash and short-term receivables.

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. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since CanadaBis Capital will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year CanadaBis Capital wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to CA$8.5m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months CanadaBis Capital produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$939k. 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 had negative free cash flow of CA$1.2m over the last twelve months. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - CanadaBis Capital has 3 warning signs we think you should be aware of.

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.