Is Empower Clinics (CSE:CBDT) Weighed On By Its Debt Load?

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 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. Importantly, Empower Clinics Inc. (CSE:CBDT) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Empower Clinics

How Much Debt Does Empower Clinics Carry?

You can click the graphic below for the historical numbers, but it shows that Empower Clinics had US$1.78m of debt in September 2021, down from US$1.91m, one year before. But on the other hand it also has US$2.16m in cash, leading to a US$378.3k net cash position.

How Strong Is Empower Clinics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Empower Clinics had liabilities of US$5.54m due within 12 months and liabilities of US$3.67m due beyond that. Offsetting these obligations, it had cash of US$2.16m as well as receivables valued at US$446.6k due within 12 months. So it has liabilities totalling US$6.60m more than its cash and near-term receivables, combined.

Since publicly traded Empower Clinics shares are worth a total of US$77.7m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Empower Clinics boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Empower Clinics will need earnings to service that debt. 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.

Over 12 months, Empower Clinics reported revenue of US$6.2m, which is a gain of 635%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is Empower Clinics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Empower Clinics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$6.1m of cash and made a loss of US$39m. Given it only has net cash of US$378.3k, the company may need to raise more capital if it doesn't reach break-even soon. The good news for shareholders is that Empower Clinics has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. Be aware that Empower Clinics is showing 5 warning signs in our investment analysis , and 2 of those can't be ignored...

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.

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.

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