Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ 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 Else Nutrition Holdings Inc. (TSE:BABY) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
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How Much Debt Does Else Nutrition Holdings Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2023 Else Nutrition Holdings had CA$3.34m of debt, an increase on none, over one year. But on the other hand it also has CA$8.90m in cash, leading to a CA$5.56m net cash position.
A Look At Else Nutrition Holdings’ Liabilities
The latest balance sheet data shows that Else Nutrition Holdings had liabilities of CA$4.91m due within a year, and liabilities of CA$10.3m falling due after that. Offsetting these obligations, it had cash of CA$8.90m as well as receivables valued at CA$3.71m due within 12 months. So its liabilities total CA$2.55m more than the combination of its cash and short-term receivables.
Of course, Else Nutrition Holdings has a market capitalization of CA$61.5m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Else Nutrition Holdings also has more cash than debt, so we’re pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Else Nutrition Holdings’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Else Nutrition Holdings reported revenue of CA$9.8m, which is a gain of 91%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Else Nutrition Holdings?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Else Nutrition Holdings had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CA$21m and booked a CA$18m accounting loss. Given it only has net cash of CA$5.56m, the company may need to raise more capital if it doesn’t reach break-even soon. Else Nutrition Holdings’s revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. For example, we’ve discovered 3 warning signs for Else Nutrition Holdings (2 are a bit concerning!) that you should be aware of before investing here.
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.
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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.