Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Harvest One Cannabis Inc. (CVE:HVT) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Harvest One Cannabis's Debt?
You can click the graphic below for the historical numbers, but it shows that Harvest One Cannabis had CA$1.88m of debt in March 2021, down from CA$3.93m, one year before. However, its balance sheet shows it holds CA$7.16m in cash, so it actually has CA$5.27m net cash.
A Look At Harvest One Cannabis' Liabilities
We can see from the most recent balance sheet that Harvest One Cannabis had liabilities of CA$8.67m falling due within a year, and liabilities of CA$2.06m due beyond that. On the other hand, it had cash of CA$7.16m and CA$3.23m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$347.0k.
Having regard to Harvest One Cannabis' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CA$24.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Harvest One Cannabis also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Harvest One Cannabis's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Harvest One Cannabis reported revenue of CA$7.2m, which is a gain of 60%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Harvest One Cannabis?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Harvest One Cannabis had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CA$9.8m of cash and made a loss of CA$24m. With only CA$5.27m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Harvest One Cannabis may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. Case in point: We've spotted 5 warning signs for Harvest One Cannabis you should be aware of, and 2 of them are a bit unpleasant.
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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