The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Canopy Growth Corporation (TSE:WEED) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Canopy Growth Carry?
The image below, which you can click on for greater detail, shows that at June 2019 Canopy Growth had debt of CA$2.08b, up from CA$620.3m in one year. But on the other hand it also has CA$3.18b in cash, leading to a CA$1.10b net cash position.
How Healthy Is Canopy Growth's Balance Sheet?
The latest balance sheet data shows that Canopy Growth had liabilities of CA$372.8m due within a year, and liabilities of CA$2.38b falling due after that. Offsetting these obligations, it had cash of CA$3.18b as well as receivables valued at CA$102.8m due within 12 months. So it actually has CA$527.2m 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! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Canopy 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.
In the last year Canopy Growth managed to grow its revenue by 231%, to CA$291m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
So How Risky Is Canopy Growth?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Canopy Growth had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through CA$1.4b of cash and made a loss of CA$1.9b. However, it has net cash of CA$3.2b, so it has a bit of time before it will need more capital. The good news for shareholders is that Canopy Growth has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. For riskier companies like Canopy Growth I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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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