Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies High Tide Inc. (CVE:HITI) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is High Tide's Net Debt?
As you can see below, High Tide had CA$25.9m of debt at July 2021, down from CA$29.5m a year prior. But on the other hand it also has CA$27.9m in cash, leading to a CA$1.96m net cash position.
How Healthy Is High Tide's Balance Sheet?
According to the last reported balance sheet, High Tide had liabilities of CA$34.1m due within 12 months, and liabilities of CA$53.3m due beyond 12 months. Offsetting these obligations, it had cash of CA$27.9m as well as receivables valued at CA$7.12m due within 12 months. 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$463.1m, 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. While it does have liabilities worth noting, High Tide also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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 there's no doubt that shareholders are cheering for growth
So How Risky Is High Tide?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that High Tide had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CA$12m and booked a CA$32m accounting loss. 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. The good news for shareholders is that High Tide has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for High Tide (1 is potentially serious) you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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