Is EarthRenew (CSE:ERTH) A Risky Investment?

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. 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?

When Is Debt A Problem?

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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for EarthRenew

What Is EarthRenew's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 EarthRenew had CA$3.87m of debt, an increase on CA$1.56m, over one year. However, it does have CA$7.54m in cash offsetting this, leading to net cash of CA$3.68m.

How Healthy Is EarthRenew's Balance Sheet?

The latest balance sheet data shows that EarthRenew had liabilities of CA$9.51m due within a year, and liabilities of CA$9.12m falling due after that. Offsetting these obligations, it had cash of CA$7.54m as well as receivables valued at CA$4.36m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$6.72m.

EarthRenew has a market capitalization of CA$18.4m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, EarthRenew also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine EarthRenew's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year EarthRenew wasn't profitable at an EBIT level, but managed to grow its revenue by 761%, to CA$20m. That's virtually the hole-in-one of revenue growth!

So How Risky Is EarthRenew?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that EarthRenew had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CA$6.3m of cash and made a loss of CA$5.5m. With only CA$3.68m on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that EarthRenew 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 EarthRenew is showing 4 warning signs in our investment analysis , and 2 of those are a bit concerning...

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.