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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Earthworks Industries Inc. (CVE:EWK) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Earthworks Industries
What Is Earthworks Industries's Net Debt?
As you can see below, Earthworks Industries had CA$8.29m of debt, at November 2021, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of CA$288.1k, its net debt is less, at about CA$8.00m.
How Healthy Is Earthworks Industries' Balance Sheet?
We can see from the most recent balance sheet that Earthworks Industries had liabilities of CA$2.04m falling due within a year, and liabilities of CA$7.08m due beyond that. On the other hand, it had cash of CA$288.1k and CA$7.4k worth of receivables due within a year. So it has liabilities totalling CA$8.82m more than its cash and near-term receivables, combined.
Earthworks Industries has a market capitalization of CA$26.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Earthworks Industries's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
It seems likely shareholders hope that Earthworks Industries can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.
Caveat Emptor
Over the last twelve months Earthworks Industries produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CA$587k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CA$553k of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Earthworks Industries has 5 warning signs (and 2 which are a bit concerning) we think you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
About TSXV:EWK
Earthworks Industries
A development stage company, focuses on providing waste disposal services in the United States and Canada.
Medium-low with acceptable track record.