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.' 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. As with many other companies Planet 13 Holdings Inc. (CNSX:PLTH) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.
What Is Planet 13 Holdings's Net Debt?
The image below, which you can click on for greater detail, shows that Planet 13 Holdings had debt of US$869.5k at the end of March 2019, a reduction from US$4.25m over a year. But it also has US$20.2m in cash to offset that, meaning it has US$19.3m net cash.
How Healthy Is Planet 13 Holdings's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Planet 13 Holdings had liabilities of US$8.60m due within 12 months and liabilities of US$9.06m due beyond that. Offsetting these obligations, it had cash of US$20.2m as well as receivables valued at US$170.7k due within 12 months. So it can boast US$2.68m more liquid assets than total liabilities.
This state of affairs indicates that Planet 13 Holdings's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$278.7m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Planet 13 Holdings 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 ultimately the future profitability of the business will decide if Planet 13 Holdings 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 Planet 13 Holdings managed to grow its revenue by 175%, to US$31m. So there's no doubt that shareholders are cheering for growth
So How Risky Is Planet 13 Holdings?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Planet 13 Holdings had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through US$19m of cash and made a loss of US$12m. But at least it has US$20m on the balance sheet to spend on growth, near-term. The good news for shareholders is that Planet 13 Holdings 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 Planet 13 Holdings 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.
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.
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