Does High Tide (CVE:HITI) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that High Tide Inc. (CVE:HITI) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for High Tide

What Is High Tide's Net Debt?

The image below, which you can click on for greater detail, shows that High Tide had debt of CA$25.9m at the end of July 2021, a reduction from CA$29.5m over a year. However, it does have CA$27.9m in cash offsetting this, leading to net cash of CA$1.96m.

A Look At High Tide's Liabilities

The latest balance sheet data shows that High Tide had liabilities of CA$34.1m due within a year, and liabilities of CA$53.3m falling due after that. On the other hand, it had cash of CA$27.9m and CA$7.12m worth of receivables due within a year. So its liabilities total CA$52.4m more than the combination of its cash and short-term receivables.

Of course, High Tide has a market capitalization of CA$318.8m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, High Tide boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if High Tide can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, High Tide reported revenue of CA$152m, which is a gain of 118%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is High Tide?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year High Tide had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$12m of cash and made a loss of CA$32m. Given it only has net cash of CA$1.96m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, High Tide's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. Be aware that High Tide is showing 3 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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. 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.