Is Decibel Cannabis (CVE:DB) A Risky Investment?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Decibel Cannabis Company Inc. (CVE:DB) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Decibel Cannabis

How Much Debt Does Decibel Cannabis Carry?

As you can see below, at the end of September 2020, Decibel Cannabis had CA$36.4m of debt, up from CA$957.5k a year ago. Click the image for more detail. On the flip side, it has CA$1.07m in cash leading to net debt of about CA$35.4m.

How Strong Is Decibel Cannabis's Balance Sheet?

According to the last reported balance sheet, Decibel Cannabis had liabilities of CA$18.3m due within 12 months, and liabilities of CA$31.2m due beyond 12 months. Offsetting these obligations, it had cash of CA$1.07m as well as receivables valued at CA$3.08m due within 12 months. So its liabilities total CA$45.3m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CA$22.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Decibel Cannabis would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Decibel 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.

Over 12 months, Decibel Cannabis reported revenue of CA$20m, which is a gain of 313%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

While we can certainly appreciate Decibel Cannabis's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping CA$8.2m. 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$11m over the last twelve months. So suffice it to say we consider the stock to be risky. 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. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Decibel Cannabis (of which 1 is potentially serious!) 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. 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.
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