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Does HEXO (TSE:HEXO) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 HEXO Corp. (TSE:HEXO) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for HEXO

How Much Debt Does HEXO Carry?

As you can see below, at the end of October 2020, HEXO had CA$59.0m of debt, up from CA$32.6m a year ago. Click the image for more detail. But it also has CA$149.8m in cash to offset that, meaning it has CA$90.7m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At HEXO's Liabilities

The latest balance sheet data shows that HEXO had liabilities of CA$58.0m due within a year, and liabilities of CA$79.7m falling due after that. Offsetting these obligations, it had cash of CA$149.8m as well as receivables valued at CA$35.3m due within 12 months. So it can boast CA$47.3m more liquid assets than total liabilities.

This short term liquidity is a sign that HEXO could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that HEXO has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if HEXO can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year HEXO wasn't profitable at an EBIT level, but managed to grow its revenue by 70%, to CA$96m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is HEXO?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that HEXO had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CA$133m and booked a CA$491m accounting loss. With only CA$90.7m on the balance sheet, it would appear that its going to need to raise capital again soon. HEXO's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for HEXO (1 is a bit unpleasant!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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