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

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. As with many other companies Replenish Nutrients Holding Corp. (CSE:ERTH) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Replenish Nutrients Holding

What Is Replenish Nutrients Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Replenish Nutrients Holding had CA$2.64m of debt in September 2024, down from CA$3.26m, one year before. However, it does have CA$213.1k in cash offsetting this, leading to net debt of about CA$2.42m.

How Strong Is Replenish Nutrients Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Replenish Nutrients Holding had liabilities of CA$6.26m due within 12 months and liabilities of CA$3.71m due beyond that. Offsetting these obligations, it had cash of CA$213.1k as well as receivables valued at CA$2.51m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$7.25m.

This deficit is considerable relative to its market capitalization of CA$11.4m, so it does suggest shareholders should keep an eye on Replenish Nutrients Holding's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is Replenish Nutrients Holding's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Replenish Nutrients Holding made a loss at the EBIT level, and saw its revenue drop to CA$7.9m, which is a fall of 46%. That makes us nervous, to say the least.

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$5.1m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CA$671k of cash over the last year. So suffice it to say we consider the stock very risky. 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. Be aware that Replenish Nutrients Holding is showing 3 warning signs in our investment analysis , and 2 of those are potentially serious...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.