The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes The biggest investment risk is not the volatility of prices, but you will suffer a permanent loss of capital. It's only natural to consider a company's balance sheet. We can see that Aurora Cannabis Inc. (TSE: ACB) does not use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists have a problem with the business. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise the equity. By replacing dilution, though, debt is an extremely good tool for businesses. The first thing to do is to consider how much debt a business uses.
Check out the latest analysis for Aurora Cannabis
How Much Debt Does Aurora Cannabis Carry?
Aurora Cannabis had CA $ 643.9m of debt, an increase on CA $ 203.2m, over one year. On the flip side, it has CA $ 316.0m in cash leading to net debt of about CA $ 327.9m.
How Strong Is Aurora Cannabis’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Aurora Cannabis had liabilities of CA $ 436.4m due within 12 months and liabilities of CA $ 676.4m due beyond that. Offsetting this, it had CA $ 316.0m in cash and CA $ 112.3m in receivables that were due within 12 months. So it has liabilities totalling CA $ 684.5m more than its cash and near-term loans, combined.
Of course, Aurora Cannabis has a market capitalization of CA $ 4.89b, so these liabilities are probably manageable. But there are sufficient liabilities. There’s no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Aurora Cannabis 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.
Over 12 months, Aurora Cannabis reported revenue of CA $ 248m, which is a gain of 349%, although it did not report any earnings before interest and tax. That’s virtually the hole-in-one of revenue growth!
Aurora Cannabis’s delicious revenue growth, EBIT leaves a bitter aftertaste. Indeed, it lost CA $ 297m at the EBIT level. When we look at that and recall the liabilities, it seems unwise to have a debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that bled CA $ 607m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. For riskier companies such as Aurora Cannabis. So click here if you want to find out for yourself.
At the end of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.
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