Health Check: How Prudently Does Flora Growth (NASDAQ:FLGC) Use Debt?

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.' 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 Flora Growth Corp. (NASDAQ:FLGC) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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 Flora Growth

How Much Debt Does Flora Growth Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Flora Growth had debt of US$2.24m, up from US$1.12m in one year. However, it does have US$4.21m in cash offsetting this, leading to net cash of US$1.97m.

How Strong Is Flora Growth's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Flora Growth had liabilities of US$20.9m due within 12 months and liabilities of US$3.20m due beyond that. On the other hand, it had cash of US$4.21m and US$8.16m worth of receivables due within a year. So it has liabilities totalling US$11.7m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$17.5m, so it does suggest shareholders should keep an eye on Flora Growth's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Flora Growth boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Flora Growth's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Flora Growth made a loss at the EBIT level, and saw its revenue drop to US$64m, which is a fall of 6.5%. That's not what we would hope to see.

So How Risky Is Flora Growth?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Flora Growth had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$4.9m of cash and made a loss of US$18m. With only US$1.97m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Flora Growth is showing 5 warning signs in our investment analysis , and 3 of those can't be ignored...

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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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.