Does Experience Co (ASX:EXP) Have A Healthy Balance Sheet?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Experience Co Limited (ASX:EXP) does have debt on its balance sheet. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Experience Co

What Is Experience Co's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Experience Co had AU$9.18m of debt, an increase on AU$7.85m, over one year. But it also has AU$18.3m in cash to offset that, meaning it has AU$9.14m net cash.

How Strong Is Experience Co's Balance Sheet?

According to the last reported balance sheet, Experience Co had liabilities of AU$37.5m due within 12 months, and liabilities of AU$27.3m due beyond 12 months. Offsetting this, it had AU$18.3m in cash and AU$2.63m in receivables that were due within 12 months. So it has liabilities totalling AU$43.8m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Experience Co is worth AU$165.9m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Experience Co 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 ultimately the future profitability of the business will decide if Experience Co can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Experience Co reported revenue of AU$56m, which is a gain of 26%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Experience Co?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Experience Co had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$7.9m of cash and made a loss of AU$14m. Given it only has net cash of AU$9.14m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Experience Co may be on a path to profitability. 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Experience Co , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.