Is Replenish Nutrients Holding (CSE:ERTH) Using Debt Sensibly?

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.' 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. Importantly, Replenish Nutrients Holding Corp. (CSE:ERTH) does carry debt. But the real question is whether this debt is making the company risky.

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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Replenish Nutrients Holding

What Is Replenish Nutrients Holding's Net Debt?

The image below, which you can click on for greater detail, shows that Replenish Nutrients Holding had debt of CA$2.77m at the end of March 2024, a reduction from CA$3.48m over a year. On the flip side, it has CA$496.0k in cash leading to net debt of about CA$2.27m.

A Look At Replenish Nutrients Holding's Liabilities

According to the last reported balance sheet, Replenish Nutrients Holding had liabilities of CA$6.59m due within 12 months, and liabilities of CA$7.05m due beyond 12 months. Offsetting this, it had CA$496.0k in cash and CA$3.33m in receivables that were due within 12 months. So it has liabilities totalling CA$9.81m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of CA$7.80m, we think shareholders really should watch Replenish Nutrients Holding's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Replenish Nutrients Holding'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.

Over 12 months, Replenish Nutrients Holding made a loss at the EBIT level, and saw its revenue drop to CA$13m, which is a fall of 24%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Replenish Nutrients Holding's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CA$4.0m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of CA$849k over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Replenish Nutrients Holding 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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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.