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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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that VIVO Cannabis Inc. (TSE:VIVO) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is VIVO Cannabis's Debt?
You can click the graphic below for the historical numbers, but it shows that VIVO Cannabis had CA$4.44m of debt in March 2021, down from CA$34.1m, one year before. But on the other hand it also has CA$17.5m in cash, leading to a CA$13.1m net cash position.
How Healthy Is VIVO Cannabis' Balance Sheet?
The latest balance sheet data shows that VIVO Cannabis had liabilities of CA$5.43m due within a year, and liabilities of CA$47.1m falling due after that. On the other hand, it had cash of CA$17.5m and CA$2.85m worth of receivables due within a year. So it has liabilities totalling CA$32.1m more than its cash and near-term receivables, combined.
This is a mountain of leverage relative to its market capitalization of CA$44.5m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, VIVO Cannabis also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since VIVO Cannabis will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, VIVO Cannabis made a loss at the EBIT level, and saw its revenue drop to CA$29m, which is a fall of 2.9%. That's not what we would hope to see.
So How Risky Is VIVO Cannabis?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year VIVO Cannabis had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$10.0m of cash and made a loss of CA$48m. However, it has net cash of CA$13.1m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for VIVO Cannabis (of which 2 can't be ignored!) you should know about.
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.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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