Does Anaergia (TSE:ANRG) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Anaergia Inc. (TSE:ANRG) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, 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.

Check out our latest analysis for Anaergia

What Is Anaergia's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Anaergia had CA$60.4m of debt in June 2024, down from CA$186.0m, one year before. However, it also had CA$39.6m in cash, and so its net debt is CA$20.9m.

How Strong Is Anaergia's Balance Sheet?

The latest balance sheet data shows that Anaergia had liabilities of CA$104.3m due within a year, and liabilities of CA$77.0m falling due after that. On the other hand, it had cash of CA$39.6m and CA$46.9m worth of receivables due within a year. So its liabilities total CA$94.8m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CA$109.2m, so it does suggest shareholders should keep an eye on Anaergia's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Anaergia's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Anaergia made a loss at the EBIT level, and saw its revenue drop to CA$116m, which is a fall of 29%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Anaergia's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CA$49m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$35m of cash over the last year. So suffice it to say we consider the stock very risky. 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. For example Anaergia has 5 warning signs (and 4 which can't be ignored) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.