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 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. We note that High Tide Inc. (CVE:HITI) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does High Tide Carry?
As you can see below, at the end of July 2020, High Tide had CA$29.5m of debt, up from CA$23.8m a year ago. Click the image for more detail. However, because it has a cash reserve of CA$7.53m, its net debt is less, at about CA$21.9m.
A Look At High Tide's Liabilities
The latest balance sheet data shows that High Tide had liabilities of CA$32.7m due within a year, and liabilities of CA$29.6m falling due after that. On the other hand, it had cash of CA$7.53m and CA$4.27m worth of receivables due within a year. So its liabilities total CA$50.4m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because High Tide is worth CA$120.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine High Tide's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, High Tide reported revenue of CA$68m, which is a gain of 207%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!
While we can certainly appreciate High Tide's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at CA$6.4m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CA$20m into a profit. So we do think this stock is quite 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. For instance, we've identified 3 warning signs for High Tide (1 shouldn't be ignored) you should be aware of.
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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