Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Citizen Stash Cannabis Corp. (CVE:CSC) 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 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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
How Much Debt Does Citizen Stash Cannabis Carry?
The image below, which you can click on for greater detail, shows that at May 2021 Citizen Stash Cannabis had debt of CA$2.30m, up from none in one year. On the flip side, it has CA$1.65m in cash leading to net debt of about CA$643.5k.
A Look At Citizen Stash Cannabis' Liabilities
Zooming in on the latest balance sheet data, we can see that Citizen Stash Cannabis had liabilities of CA$1.54m due within 12 months and liabilities of CA$2.30m due beyond that. On the other hand, it had cash of CA$1.65m and CA$1.84m worth of receivables due within a year. So it has liabilities totalling CA$339.6k more than its cash and near-term receivables, combined.
This state of affairs indicates that Citizen Stash Cannabis' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CA$33.9m company is struggling for cash, we still think it's worth monitoring its balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But it is Citizen Stash Cannabis's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Citizen Stash Cannabis wasn't profitable at an EBIT level, but managed to grow its revenue by 262%, to CA$10m. That's virtually the hole-in-one of revenue growth!
Even though Citizen Stash Cannabis managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost CA$2.4m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CA$4.0m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Citizen Stash Cannabis (at least 2 which don't sit too well with us) , and understanding them should be part of your investment process.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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