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Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but suffering a permanent loss of capital.” . So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We note that Columbia Care Inc. (CSE: CCHW) has debt on its balance sheet. But should shareholders be concerned about its use of debt?
When Is Debt a Problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest review for Columbia Care
What is Columbia Care’s net debt?
As you can see below, at the end of June 2021, Columbia Care was in debt of $ 141.2 million, up from $ 43.8 million a year ago. Click on the image for more details. However, his balance sheet shows that he holds $ 148.8 million in cash, so he actually has $ 7.59 million in net cash.
Is Columbia Care’s track record healthy?
We can see from the most recent balance sheet that Columbia Care had liabilities of US $ 287.8 million due within one year and liabilities of US $ 583.4 million due beyond. . In return, he had $ 148.8 million in cash and $ 10.6 million in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 711.9 million.
While that might sound like a lot, it’s not that bad since Columbia Care has a market cap of $ 1.42 billion, and could therefore likely strengthen its balance sheet by raising capital if needed. However, it is always worth taking a close look at your ability to repay debts. While it has some liabilities to note, Columbia Care also has more cash than debt, so we’re pretty confident it can handle its debt safely. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine Columbia Care’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Last year, Columbia Care was unprofitable on EBIT level, but managed to increase revenue by 213%, to US $ 313 million. When it comes to revenue growth, it’s like winning the game by earning 3 points!
So how risky is Columbia Care?
By their very nature, businesses that lose money are riskier than those with a long history of profitability. And the point is that over the past twelve months Columbia Care has lost money in earnings before interest and taxes (EBIT). And during the same period, it recorded a negative free cash outflow of US $ 74 million and a book loss of US $ 92 million. With only US $ 7.59 million on the balance sheet, it looks like it will soon have to raise capital again. The good news for shareholders is that Columbia Care is experiencing tremendous revenue growth, so there is a very good chance that it will be able to increase its free cash flow in the years to come. While unprofitable businesses can be risky, they can also grow quickly and rapidly during those pre-profit years. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. Concrete example: we have spotted 3 warning signs for Columbia Care you must be aware.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash-flow-growing stocks today.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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