U.S. Markets close in 2 hrs 19 mins

Cannara Biotech (CNSX:LOVE) May Not Be Profitable But It Seems To Be Managing Its Debt Just Fine, Anyway

Simply Wall St

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. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Cannara Biotech Inc. (CNSX:LOVE) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Cannara Biotech

What Is Cannara Biotech's Net Debt?

As you can see below, Cannara Biotech had CA$12.5m of debt, at August 2019, which is about the same the year before. You can click the chart for greater detail. However, its balance sheet shows it holds CA$26.5m in cash, so it actually has CA$14.0m net cash.

CNSX:LOVE Historical Debt, December 4th 2019

How Healthy Is Cannara Biotech's Balance Sheet?

We can see from the most recent balance sheet that Cannara Biotech had liabilities of CA$5.09m falling due within a year, and liabilities of CA$13.1m due beyond that. Offsetting this, it had CA$26.5m in cash and CA$828.3k in receivables that were due within 12 months. So it can boast CA$9.16m more liquid assets than total liabilities.

This surplus suggests that Cannara Biotech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Cannara Biotech has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Cannara Biotech's earnings that will influence how the balance sheet holds up in the future. 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 Cannara Biotech wasn't profitable at an EBIT level, but managed to grow its revenue by142%, to CA$2.1m. So there's no doubt that shareholders are cheering for growth

So How Risky Is Cannara Biotech?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Cannara Biotech lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$31m of cash and made a loss of CA$12m. With only CA$14.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Cannara Biotech's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Cannara Biotech insider transactions.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.