David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Cronos Australia Limited (ASX:CAU) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Cronos Australia

What Is Cronos Australia's Net Debt?

As you can see below, at the end of June 2021, Cronos Australia had AU$2.36m of debt, up from AU$1.79m a year ago. Click the image for more detail. But it also has AU$9.47m in cash to offset that, meaning it has AU$7.10m net cash.

How Strong Is Cronos Australia's Balance Sheet?

According to the last reported balance sheet, Cronos Australia had liabilities of AU$3.21m due within 12 months, and liabilities of AU$253.7k due beyond 12 months. Offsetting this, it had AU$9.47m in cash and AU$433.3k in receivables that were due within 12 months. So it can boast AU$6.43m more liquid assets than total liabilities.

This excess liquidity is a great indication that Cronos Australia's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Cronos Australia has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Cronos Australia will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Cronos Australia reported revenue of AU$1.7m, which is a gain of 1,267%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is Cronos Australia?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Cronos Australia had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$4.8m of cash and made a loss of AU$4.0m. While this does make the company a bit risky, it's important to remember it has net cash of AU$7.10m. That means it could keep spending at its current rate for more than two years. Importantly, Cronos Australia's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. Case in point: We've spotted 3 warning signs for Cronos Australia you should be aware of, and 1 of them can't be ignored.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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