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 THC Global Group Limited (ASX:THC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.
What Is THC Global Group's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2020 THC Global Group had debt of AU$3.76m, up from none in one year. But it also has AU$9.04m in cash to offset that, meaning it has AU$5.28m net cash.
How Healthy Is THC Global Group's Balance Sheet?
The latest balance sheet data shows that THC Global Group had liabilities of AU$2.07m due within a year, and liabilities of AU$8.76m falling due after that. On the other hand, it had cash of AU$9.04m and AU$849.8k worth of receivables due within a year. So it has liabilities totalling AU$939.7k more than its cash and near-term receivables, combined.
Of course, THC Global Group has a market capitalization of AU$41.4m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, THC Global Group 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 it is THC Global Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, THC Global Group reported revenue of AU$6.1m, which is a gain of 74%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is THC Global Group?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year THC Global Group had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of AU$9.7m and booked a AU$12m accounting loss. With only AU$5.28m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, THC Global Group 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. Like risks, for instance. Every company has them, and we've spotted 4 warning signs for THC Global Group (of which 1 is significant!) you should know about.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
This article by Simply Wall St is general in nature. 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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