Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk’. 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 note that VIVO Cannabis Inc. (TSE:VIVO) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. 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.

How Much Debt Does VIVO Cannabis Carry?

The image below, which you can click on for greater detail, shows that at March 2020 VIVO Cannabis had debt of CA$34.1m, up from CA$30.1m in one year. But it also has CA$37.4m in cash to offset that, meaning it has CA$3.30m net cash.

TSX:VIVO Historical Debt June 17th 2020

A Look At VIVO Cannabis’s Liabilities

According to the last reported balance sheet, VIVO Cannabis had liabilities of CA$42.6m due within 12 months, and liabilities of CA$43.1m due beyond 12 months. Offsetting these obligations, it had cash of CA$37.4m as well as receivables valued at CA$6.25m due within 12 months. So its liabilities total CA$42.0m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CA$69.5m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, VIVO Cannabis boasts net cash, so it’s fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is VIVO Cannabis’s earnings that will influence how the balance sheet holds up in the future. 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.

In the last year VIVO Cannabis wasn’t profitable at an EBIT level, but managed to grow its revenue by 85%, to CA$26m. Shareholders probably have their fingers crossed that it can grow its way to profits.

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 negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through CA$31m of cash and made a loss of CA$47m. But at least it has CA$3.30m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, VIVO Cannabis may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great 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.

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