Tikun Olam-Cannbit Pharmaceuticals (TLV:TKUN) Has Debt But No Earnings; Should You Worry?

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. 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.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Tikun Olam-Cannbit Pharmaceuticals

What Is Tikun Olam-Cannbit Pharmaceuticals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Tikun Olam-Cannbit Pharmaceuticals had ₪14.0m of debt, an increase on ₪11.5m, over one year. However, it also had ₪6.64m in cash, and so its net debt is ₪7.35m.

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

The latest balance sheet data shows that Tikun Olam-Cannbit Pharmaceuticals had liabilities of ₪28.3m due within a year, and liabilities of ₪15.2m falling due after that. Offsetting these obligations, it had cash of ₪6.64m as well as receivables valued at ₪5.89m due within 12 months. So its liabilities total ₪31.0m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's ₪26.1m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tikun Olam-Cannbit Pharmaceuticals will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Tikun Olam-Cannbit Pharmaceuticals had a loss before interest and tax, and actually shrunk its revenue by 10%, to ₪44m. That's not what we would hope to see.

Caveat Emptor

While Tikun Olam-Cannbit Pharmaceuticals's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₪93m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through ₪4.1m in negative free cash flow over the last year. So suffice it to say we consider the stock to be 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Tikun Olam-Cannbit Pharmaceuticals (of which 4 don't sit too well with us!) you should know about.

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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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com