Health Check: How Prudently Does Tikun Olam-Cannbit Pharmaceuticals (TLV:TKUN) Use Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Tikun Olam-Cannbit Pharmaceuticals Ltd (TLV:TKUN) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Tikun Olam-Cannbit Pharmaceuticals

How Much Debt Does Tikun Olam-Cannbit Pharmaceuticals Carry?

As you can see below, Tikun Olam-Cannbit Pharmaceuticals had ₪12.8m of debt at June 2024, down from ₪18.7m a year prior. On the flip side, it has ₪4.18m in cash leading to net debt of about ₪8.61m.

How Healthy Is Tikun Olam-Cannbit Pharmaceuticals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tikun Olam-Cannbit Pharmaceuticals had liabilities of ₪25.7m due within 12 months and liabilities of ₪11.1m due beyond that. On the other hand, it had cash of ₪4.18m and ₪7.76m worth of receivables due within a year. So it has liabilities totalling ₪24.8m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₪29.8m, so it does suggest shareholders should keep an eye on Tikun Olam-Cannbit Pharmaceuticals' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Tikun Olam-Cannbit Pharmaceuticals'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.

In the last year Tikun Olam-Cannbit Pharmaceuticals had a loss before interest and tax, and actually shrunk its revenue by 16%, to ₪43m. We would much prefer see growth.

Caveat Emptor

Not only did Tikun Olam-Cannbit Pharmaceuticals's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₪51m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₪50m. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Tikun Olam-Cannbit Pharmaceuticals is showing 3 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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