Some people say that volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said, “Volatility is not synonymous with risk.” In other words, financially smart people seem to know that debt (usually associated with bankruptcy) is a very important factor when assessing a company’s risk.I understand that Els Nutrition Holdings Co., Ltd. (TSE:BABY) uses debt in its business. But the more important question is how much risk that debt creates.
When is debt a problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it is at their mercy. Part of capitalism is the process of “creative destruction” in which failing companies are ruthlessly liquidated by bankers. But a more common (but still expensive) situation is when a company needs to dilute shareholders at a cheap share price just to manage its debt. The advantage of debt, of course, is that it is often cheap capital, especially when it replaces dilution in a company that can be reinvested at a high rate of return. The first thing to do when considering how much debt a company uses is to look at its cash and debt together.
Check out our latest analysis for Else Nutrition Holdings.
How much debt does Else Nutrition Holdings have?
As you can see below, Else Nutrition Holdings had debt of CA$2.79m at December 2023, which is about the same as last year. Click on the graph to see details. However, its balance sheet shows it has CA$4.93m in cash, so it actually has CA$2.14m net cash.
Debt Overview of Else Nutrition Holdings
The latest balance sheet data shows that Else Nutrition Holdings had liabilities of CA$3.17m due within a year, and liabilities of CA$6.18m due beyond that. Offsetting these obligations, the company had cash of CA$4.93m from him and receivables valued at CA$1.94m due within 12 months. So it has liabilities of CA$2.48m more than its cash and short-term receivables, combined.
Else Nutrition Holdings’ listed shares have a total value of CA$38.3m, so we think this level of debt is unlikely to pose much of a threat. However, we think it’s worth keeping an eye on its balance sheet strength, as that can change over time. Despite its notable debt, Else Nutrition Holdings boasts net cash, so it’s safe to say it doesn’t have a lot of debt. The balance sheet is clearly the area to focus on when analyzing debt. However, debt cannot be considered completely separately. This is because Else Nutrition Holdings will need earnings to service its debt. So when considering debt, it’s worth keeping an eye on the earnings trend. Click here to view an interactive snapshot.
Else Nutrition Holdings reported revenue of CA$9.4 million for the trailing twelve months. This is an increase of 9.8%. However, it does not report earnings before interest and taxes. Its growth rate is a little slow for our tastes, but we need all types to create a world.
So how risky is Els Nutrition Holdings?
Statistically speaking, companies that are losing money are riskier than companies that are making profits. We also note that Els Nutrition Holdings made a loss in earnings before interest and tax (EBIT) last year. In fact, during that time he burned through C$18 million in cash and made a loss of C$16 million. With just C$2.14 million on its balance sheet, it will likely need to raise capital again soon. In summary, we’re a bit skeptical of this, as it looks pretty risky when there’s no free cash flow. When analyzing debt levels, the balance sheet is the obvious place to start. Ultimately, however, any company can contain risks that exist outside the balance sheet. For example, we discovered that 5 warning signs for Else Nutrition Holdings (Two could be serious!) You should be careful before investing here.
If you’re interested in investing in a business that allows you to grow profits without taking on debt, check this out free A list of growing companies that have net cash on their balance sheet.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and the articles are not intended as financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
