Is Decibel Cannabis (CVE:DB) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Decibel Cannabis Company Inc. (CVE:DB) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Decibel Cannabis

What Is Decibel Cannabis's Debt?

The chart below, which you can click on for greater detail, shows that Decibel Cannabis had CA$43.7m in debt in December 2022; about the same as the year before. However, it does have CA$2.97m in cash offsetting this, leading to net debt of about CA$40.8m.

How Healthy Is Decibel Cannabis' Balance Sheet?

We can see from the most recent balance sheet that Decibel Cannabis had liabilities of CA$53.9m falling due within a year, and liabilities of CA$39.8m due beyond that. On the other hand, it had cash of CA$2.97m and CA$16.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$74.0m.

Given this deficit is actually higher than the company's market capitalization of CA$55.0m, we think shareholders really should watch Decibel Cannabis's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Decibel Cannabis's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Decibel Cannabis wasn't profitable at an EBIT level, but managed to grow its revenue by 51%, to CA$79m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Decibel Cannabis's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CA$318k at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of CA$4.5m. And until that time we think this is a risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Decibel Cannabis you should know about.

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.