Would Tikun Olam-Cannbit Pharmaceuticals (TLV:TKUN) Be Better Off With Less Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Tikun Olam-Cannbit Pharmaceuticals

How Much Debt Does Tikun Olam-Cannbit Pharmaceuticals Carry?

The image below, which you can click on for greater detail, shows that at June 2022 Tikun Olam-Cannbit Pharmaceuticals had debt of ₪18.4m, up from ₪8.77m in one year. However, because it has a cash reserve of ₪5.55m, its net debt is less, at about ₪12.9m.

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

We can see from the most recent balance sheet that Tikun Olam-Cannbit Pharmaceuticals had liabilities of ₪32.0m falling due within a year, and liabilities of ₪20.5m due beyond that. On the other hand, it had cash of ₪5.55m and ₪11.4m worth of receivables due within a year. So its liabilities total ₪35.5m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Tikun Olam-Cannbit Pharmaceuticals is worth ₪79.9m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

Over 12 months, Tikun Olam-Cannbit Pharmaceuticals reported revenue of ₪41m, which is a gain of 48%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Tikun Olam-Cannbit Pharmaceuticals managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable ₪37m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₪26m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Case in point: We've spotted 5 warning signs for Tikun Olam-Cannbit Pharmaceuticals you should be aware of, and 2 of them are significant.

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.

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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.