Is cbdMD (NYSEMKT:YCBD) Weighed On By Its Debt Load?

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 cbdMD, Inc. (NYSEMKT:YCBD) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for cbdMD

What Is cbdMD's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2020 cbdMD had debt of US$1.69m, up from none in one year. But it also has US$15.1m in cash to offset that, meaning it has US$13.4m net cash.

How Healthy Is cbdMD's Balance Sheet?

The latest balance sheet data shows that cbdMD had liabilities of US$4.39m due within a year, and liabilities of US$23.3m falling due after that. Offsetting this, it had US$15.1m in cash and US$715.2k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$12.0m.

Of course, cbdMD has a market capitalization of US$109.9m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, cbdMD 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 ultimately the future profitability of the business will decide if cbdMD 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.

In the last year cbdMD wasn't profitable at an EBIT level, but managed to grow its revenue by 411%, to US$40m. That's virtually the hole-in-one of revenue growth!

So How Risky Is cbdMD?

While cbdMD lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of US$31m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. The good news for cbdMD shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with cbdMD (at least 3 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.

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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