Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Element Lifestyle Retirement Inc. (CVE:ELM) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Element Lifestyle Retirement
What Is Element Lifestyle Retirement's Debt?
As you can see below, at the end of November 2020, Element Lifestyle Retirement had CA$2.08m of debt, up from CA$1.87m a year ago. Click the image for more detail. However, because it has a cash reserve of CA$361.2k, its net debt is less, at about CA$1.72m.
How Strong Is Element Lifestyle Retirement's Balance Sheet?
The latest balance sheet data shows that Element Lifestyle Retirement had liabilities of CA$241.8k due within a year, and liabilities of CA$2.10m falling due after that. Offsetting this, it had CA$361.2k in cash and CA$1.08m in receivables that were due within 12 months. So it has liabilities totalling CA$895.6k more than its cash and near-term receivables, combined.
Given Element Lifestyle Retirement has a market capitalization of CA$7.05m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Element Lifestyle Retirement will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Given it has no significant operating revenue at the moment, shareholders will be hoping Element Lifestyle Retirement can make progress and gain better traction for the business, before it runs low on cash.
Caveat Emptor
Over the last twelve months Element Lifestyle Retirement produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$1.4m. 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. Another cause for caution is that is bled CA$1.3m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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 instance, we've identified 5 warning signs for Element Lifestyle Retirement that you should be aware of.
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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About TSXV:ELM
Element Lifestyle Retirement
Engages in the development and operation of senior retirement communities in Canada.
Moderate and slightly overvalued.