Does VIVO Cannabis (TSE:VIVO) use debt wisely?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies VIVO Cannabis Inc. (TSE: VIVO) uses debt. But does this debt worry shareholders?

What risk does debt carry?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, many companies use debt to finance their growth, without any negative consequences. When we look at debt levels, we first consider cash and debt levels, together.

See our latest review for VIVO Cannabis

What is VIVO Cannabis’ net debt?

The image below, which you can click on for more details, shows that VIVO Cannabis had C$4.67 million in debt at the end of September 2021, a reduction from C$5.08 million on a year. But on the other hand, it also has C$12.8 million in cash, resulting in a net cash position of C$8.17 million.

TSX:VIVO Debt to Equity January 25, 2022

How healthy is VIVO Cannabis’ balance sheet?

Zooming in on the latest balance sheet data, we can see that VIVO Cannabis had liabilities of C$4.95 million due within 12 months and liabilities of C$46.9 million due beyond. In return, he had C$12.8 million in cash and C$3.80 million in debt due within 12 months. Thus, its liabilities outweigh the sum of its cash and (current) receivables of C$35.2 million.

When you consider that this deficit exceeds the company’s C$26.0 million market capitalization, you may well be inclined to take a close look at the balance sheet. In theory, extremely large dilution would be required if the company were forced to repay its debts by raising capital at the current share price. VIVO Cannabis has net cash, so it’s fair to say that it doesn’t have a lot of debt, even though it has very large liabilities, in total. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in total isolation; since VIVO Cannabis will need income to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

Year-over-year, VIVO Cannabis reported a loss in EBIT and saw revenue drop to C$24 million, a 30% decline. To be honest, that doesn’t bode well.

So how risky is VIVO cannabis?

Statistically speaking, businesses that lose money are riskier than those that make money. And over the past year, VIVO Cannabis has had a loss in earnings before interest and taxes (EBIT), if truth be told. Indeed, during this period, it burned C$7.0 million in cash and suffered a loss of C$45 million. But at least it has C$8.17 million on the balance sheet to spend on near-term growth. In summary, we are a little skeptical of this one, as it looks quite risky in the absence of free cash flow. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. For example, we have identified 5 Warning Signs for VIVO Cannabis (2 are a bit of a concern) that you should be aware of.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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