Replenish Nutrients Holding (CSE:ERTH) Has Debt But No Earnings; Should You Worry?

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.' 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. Importantly, Replenish Nutrients Holding Corp. (CSE:ERTH) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Replenish Nutrients Holding

How Much Debt Does Replenish Nutrients Holding Carry?

You can click the graphic below for the historical numbers, but it shows that Replenish Nutrients Holding had CA$3.26m of debt in September 2023, down from CA$3.68m, one year before. However, because it has a cash reserve of CA$1.76m, its net debt is less, at about CA$1.50m.

How Strong Is Replenish Nutrients Holding's Balance Sheet?

According to the last reported balance sheet, Replenish Nutrients Holding had liabilities of CA$9.48m due within 12 months, and liabilities of CA$9.28m due beyond 12 months. On the other hand, it had cash of CA$1.76m and CA$4.88m worth of receivables due within a year. So its liabilities total CA$12.1m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's CA$10.6m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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.

In the last year Replenish Nutrients Holding had a loss before interest and tax, and actually shrunk its revenue by 31%, to CA$15m. 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$2.3m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of CA$2.4m over the last twelve months. That means it's on the risky side of things. 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 Replenish Nutrients Holding is showing 4 warning signs in our investment analysis , and 2 of those are potentially serious...

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.