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 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 Curaleaf Holdings, Inc. (CNSX:CURA) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Curaleaf Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Curaleaf Holdings had US$95.5m of debt, an increase on US$30.4m, over one year. But it also has US$107.3m in cash to offset that, meaning it has US$11.8m net cash.
A Look At Curaleaf Holdings's Liabilities
We can see from the most recent balance sheet that Curaleaf Holdings had liabilities of US$49.1m falling due within a year, and liabilities of US$174.8m due beyond that. On the other hand, it had cash of US$107.3m and US$14.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$102.1m.
Given Curaleaf Holdings has a market capitalization of US$2.86b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Curaleaf Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Curaleaf Holdings'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 Curaleaf Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by286%, to US$137m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
So How Risky Is Curaleaf Holdings?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Curaleaf Holdings had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$122m and booked a US$84m accounting loss. With only US$11.8m on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that Curaleaf Holdings has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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 Curaleaf Holdings insider transactions.
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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