Verde AgriTech (TSE:NPK) 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.' 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 Verde AgriTech Limited (TSE:NPK) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Verde AgriTech

How Much Debt Does Verde AgriTech Carry?

The chart below, which you can click on for greater detail, shows that Verde AgriTech had CA$42.2m in debt in September 2024; about the same as the year before. However, it does have CA$3.43m in cash offsetting this, leading to net debt of about CA$38.8m.

How Strong Is Verde AgriTech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Verde AgriTech had liabilities of CA$29.8m due within 12 months and liabilities of CA$15.5m due beyond that. Offsetting these obligations, it had cash of CA$3.43m as well as receivables valued at CA$11.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$30.5m.

This is a mountain of leverage relative to its market capitalization of CA$31.1m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Verde AgriTech'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, Verde AgriTech made a loss at the EBIT level, and saw its revenue drop to CA$26m, which is a fall of 46%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Verde AgriTech'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$8.0m 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. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CA$12m. So in short it's a really risky stock. 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 Verde AgriTech is showing 3 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.