Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Canopy Growth Corporation (TSE:WEED) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Canopy Growth's Debt?
As you can see below, Canopy Growth had CA$500.4m of debt at June 2020, down from CA$805.8m a year prior. However, it does have CA$2.06b in cash offsetting this, leading to net cash of CA$1.56b.
How Strong Is Canopy Growth's Balance Sheet?
We can see from the most recent balance sheet that Canopy Growth had liabilities of CA$319.7m falling due within a year, and liabilities of CA$1.26b due beyond that. Offsetting this, it had CA$2.06b in cash and CA$72.6m in receivables that were due within 12 months. So it actually has CA$544.4m more liquid assets than total liabilities.
This surplus suggests that Canopy Growth has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Canopy 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 ultimately the future profitability of the business will decide if Canopy Growth can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Canopy Growth reported revenue of CA$419m, which is a gain of 44%, 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.
So How Risky Is Canopy Growth?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Canopy Growth lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$1.3b and booked a CA$1.2b accounting loss. However, it has net cash of CA$1.56b, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Canopy Growth may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Canopy Growth you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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. 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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