Is the THC Global group (ASX: THC) weighed down by its debt?
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 risk.” So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. We note that Global THC Group Limited (ASX: THC) has a debt on its balance sheet. But the most important question is: what risk does this debt create?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. 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.
What is THC Global Group net debt?
The image below, which you can click for more details, shows that as of June 2020, THC Global Group was in debt of A $ 3.76 million, down from zero in a year. But he also has A $ 9.04 million in cash to make up for that, which means he has net cash of A $ 5.28 million.
How healthy is THC Global Group’s track record?
The latest balance sheet data shows that THC Global Group had debts of A $ 2.07 million due within one year, and debts of A $ 8.76 million due thereafter. On the other hand, he had A $ 9.04 million in cash and A $ 849.8,000 in receivables due within one year. It therefore has liabilities totaling AU $ 939.7,000 more than its cash and short-term receivables combined.
Of course, THC Global Group has a market cap of A $ 41.4 million, so those liabilities are likely manageable. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. Despite its notable liabilities, THC Global Group has a net cash flow, so it’s fair to say it doesn’t have a lot of debt! When analyzing debt levels, the balance sheet is the obvious starting point. But it is the profits of THC Global Group that will influence the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Over 12 months, THC Global Group reported sales of AU $ 6.1 million, a gain of 74%, although it reported no profit before interest and taxes. Hopefully the business will be able to move towards profitability.
So how risky is THC Global Group?
By their very nature, businesses that lose money are riskier than those with a long history of profitability. And over the past year, THC Global Group has recorded a loss of earnings before interest and taxes (EBIT), frankly. And during the same period, it recorded negative AUS $ 9.7 million free cash outflows and a book loss of A $ 12 million. With only A $ 5.28 million on the balance sheet, it looks like it will soon have to raise capital again. With very solid revenue growth over the past year, THC Global Group could be on the path to profitability. Nonprofits are often risky, but they can also offer great rewards. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. Like risks, for example. Every business has them, and we’ve spotted 4 warning signs for THC Global Group (of which 1 is significant!) that you should know.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
This Simply Wall St article is general in nature. 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 any of the stocks mentioned.