Does TerrAscend (CSE: TER) have a healthy track record?
Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried “. 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 notice that TerrAscend Corp. (CSE: TER) has debt on its balance sheet. But does this debt worry shareholders?
What risk does debt entail?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
Check out our latest review for TerrAscend
What is TerrAscend’s debt?
You can click on the graph below for historical numbers, but it shows that in March 2021, TerrAscend had a debt of $ 182.3 million, an increase from $ 56.5 million, on a year. But it also has $ 234.2 million in cash to make up for that, which means it has $ 51.9 million in net cash.
A look at the responsibilities of TerrAscend
We can see from the most recent balance sheet that TerrAscend had US $ 101.6 million debt due within one year, and US $ 355.8 million debt due beyond. . On the other hand, it had US $ 234.2 million in cash and US $ 10.4 million in receivables due within one year. It therefore has a liability totaling US $ 212.7 million more than its cash and short-term receivables combined.
Considering that TerrAscend has a market cap of US $ 2.27 billion, it’s hard to believe that these liabilities pose a big threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward. Despite its notable liabilities, TerrAscend has a net cash flow, so it’s fair to say that it doesn’t have a heavy debt load!
Notably, TerrAscend recorded a loss in EBIT level last year, but improved it to achieve positive EBIT of US $ 77 million in the last twelve months. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the future profitability of the business will decide whether TerrAscend can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business can only pay off its debts with hard cash, not with book profits. TerrAscend may have net cash on the balance sheet, but it’s always interesting to see how well the business converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. In the past year, TerrAscend has recorded negative free cash flow, in total. Debt is typically more expensive and almost always riskier in the hands of a business with negative free cash flow. Shareholders should hope for improvement.
While it’s always a good idea to look at a company’s total liabilities, it’s very reassuring that TerrAscend has $ 51.9 million in net cash. So we have no problem with TerrAscend’s use of debt. 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. Note that TerrAscend displays 1 warning sign in our investment analysis , you must 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.
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