The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Alcanna Inc. (TSE:CLIQ) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Alcanna

How Much Debt Does Alcanna Carry?

As you can see below, Alcanna had CA$76.5m of debt at March 2021, down from CA$82.7m a year prior. However, it does have CA$156.4m in cash offsetting this, leading to net cash of CA$79.8m.

A Look At Alcanna's Liabilities

The latest balance sheet data shows that Alcanna had liabilities of CA$128.1m due within a year, and liabilities of CA$230.1m falling due after that. Offsetting this, it had CA$156.4m in cash and CA$9.04m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$192.8m.

This deficit is considerable relative to its market capitalization of CA$247.3m, so it does suggest shareholders should keep an eye on Alcanna's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Alcanna also has more cash than debt, so we're pretty confident it can manage its debt safely.

We also note that Alcanna improved its EBIT from a last year's loss to a positive CA$18m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Alcanna can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.