Is Flora Growth (NASDAQ:FLGC) Using Too Much 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 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. We can see that Flora Growth Corp. (NASDAQ:FLGC) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 think about a company's use of debt, we first look at cash and debt together.

What Is Flora Growth's Net Debt?

As you can see below, at the end of December 2024, Flora Growth had US$2.08m of debt, up from US$1.93m a year ago. Click the image for more detail. But it also has US$6.02m in cash to offset that, meaning it has US$3.94m net cash.

How Healthy Is Flora Growth's Balance Sheet?

We can see from the most recent balance sheet that Flora Growth had liabilities of US$18.8m falling due within a year, and liabilities of US$2.89m due beyond that. Offsetting this, it had US$6.02m in cash and US$7.30m in receivables that were due within 12 months. So it has liabilities totalling US$8.40m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$13.1m. 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! When analysing debt levels, the balance sheet is the obvious place to start. 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.

See our latest analysis for Flora Growth

Over 12 months, Flora Growth made a loss at the EBIT level, and saw its revenue drop to US$60m, which is a fall of 22%. That makes us nervous, to say the least.

So How Risky Is Flora Growth?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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$5.2m of cash and made a loss of US$16m. But at least it has US$3.94m on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For example, we've discovered 4 warning signs for Flora Growth (2 are a bit concerning!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.