Is Element Lifestyle Retirement (CVE:ELM) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Element Lifestyle Retirement Inc. (CVE:ELM) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Element Lifestyle Retirement

What Is Element Lifestyle Retirement's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of August 2020 Element Lifestyle Retirement had CA$2.03m of debt, an increase on CA$1.82m, over one year. However, it does have CA$180.9k in cash offsetting this, leading to net debt of about CA$1.85m.

How Strong Is Element Lifestyle Retirement's Balance Sheet?

The latest balance sheet data shows that Element Lifestyle Retirement had liabilities of CA$213.6k due within a year, and liabilities of CA$2.06m falling due after that. On the other hand, it had cash of CA$180.9k and CA$981.5k worth of receivables due within a year. So its liabilities total CA$1.11m more than the combination of its cash and short-term receivables.

Given Element Lifestyle Retirement has a market capitalization of CA$5.99m, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Element Lifestyle Retirement'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.

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

Importantly, Element Lifestyle Retirement had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$1.8m. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$1.7m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Element Lifestyle Retirement is showing 5 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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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