EarthRenew (CSE:ERTH) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 EarthRenew Inc. (CSE:ERTH) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for EarthRenew

What Is EarthRenew's Net Debt?

As you can see below, at the end of September 2022, EarthRenew had CA$3.68m of debt, up from CA$3.08m a year ago. Click the image for more detail. However, its balance sheet shows it holds CA$4.43m in cash, so it actually has CA$747.2k net cash.

A Look At EarthRenew's Liabilities

Zooming in on the latest balance sheet data, we can see that EarthRenew had liabilities of CA$16.0m due within 12 months and liabilities of CA$9.36m due beyond that. On the other hand, it had cash of CA$4.43m and CA$6.26m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$14.7m.

This deficit is considerable relative to its market capitalization of CA$19.2m, so it does suggest shareholders should keep an eye on EarthRenew's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, EarthRenew boasts net cash, so it's fair to say it does not have a heavy debt load! 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 EarthRenew 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.

In the last year EarthRenew wasn't profitable at an EBIT level, but managed to grow its revenue by 452%, to CA$21m. That's virtually the hole-in-one of revenue growth!

So How Risky Is EarthRenew?

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 EarthRenew lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$8.2m and booked a CA$4.2m accounting loss. With only CA$747.2k on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, EarthRenew's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for EarthRenew (3 are a bit concerning) you should be aware of.

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.