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

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.' 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. Importantly, High Tide Inc. (CVE:HITI) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt 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$28.0m at the end of July 2024, a reduction from CA$38.2m over a year. However, it does have CA$36.0m in cash offsetting this, leading to net cash of CA$7.94m.

How Strong Is High Tide's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that High Tide had liabilities of CA$60.1m due within 12 months and liabilities of CA$30.7m due beyond that. On the other hand, it had cash of CA$36.0m and CA$2.64m worth of receivables due within a year. So it has liabilities totalling CA$52.2m more than its cash and near-term receivables, combined.

This deficit isn't so bad because High Tide is worth CA$235.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, High Tide boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, High Tide made a loss at the EBIT level, last year, but improved that to positive EBIT of CA$13m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if High Tide can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. High Tide may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, High Tide actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although High Tide's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CA$7.94m. The cherry on top was that in converted 205% of that EBIT to free cash flow, bringing in CA$26m. So we don't have any problem with High Tide's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with High Tide , and understanding them should be part of your investment process.

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.