Tikun Olam-Cannbit Pharmaceuticals (TLV:TKUN) Is Carrying A Fair Bit Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Tikun Olam-Cannbit Pharmaceuticals Ltd (TLV:TKUN) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Tikun Olam-Cannbit Pharmaceuticals

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

As you can see below, at the end of June 2021, Tikun Olam-Cannbit Pharmaceuticals had ₪8.77m of debt, up from ₪1.49m a year ago. Click the image for more detail. However, it also had ₪6.10m in cash, and so its net debt is ₪2.68m.

A Look At Tikun Olam-Cannbit Pharmaceuticals' Liabilities

We can see from the most recent balance sheet that Tikun Olam-Cannbit Pharmaceuticals had liabilities of ₪21.7m falling due within a year, and liabilities of ₪32.5m due beyond that. On the other hand, it had cash of ₪6.10m and ₪13.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪34.8m.

While this might seem like a lot, it is not so bad since Tikun Olam-Cannbit Pharmaceuticals has a market capitalization of ₪174.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Tikun Olam-Cannbit Pharmaceuticals will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Tikun Olam-Cannbit Pharmaceuticals reported revenue of ₪28m, which is a gain of 158%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Despite the top line growth, Tikun Olam-Cannbit Pharmaceuticals still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₪40m. 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. Another cause for caution is that is bled ₪47m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. We've identified 5 warning signs with Tikun Olam-Cannbit Pharmaceuticals (at least 2 which are a bit unpleasant) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.

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