Sherritt International (TSE:S) 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.' 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, Sherritt International Corporation (TSE:S) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Sherritt International

What Is Sherritt International's Debt?

The image below, which you can click on for greater detail, shows that Sherritt International had debt of CA$439.6m at the end of June 2021, a reduction from CA$727.6m over a year. On the flip side, it has CA$153.8m in cash leading to net debt of about CA$285.8m.

How Healthy Is Sherritt International's Balance Sheet?

The latest balance sheet data shows that Sherritt International had liabilities of CA$197.1m due within a year, and liabilities of CA$575.1m falling due after that. Offsetting these obligations, it had cash of CA$153.8m as well as receivables valued at CA$167.6m due within 12 months. So it has liabilities totalling CA$450.8m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CA$149.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Sherritt International would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Sherritt International can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Sherritt International made a loss at the EBIT level, and saw its revenue drop to CA$106m, which is a fall of 15%. We would much prefer see growth.

Caveat Emptor

Not only did Sherritt International's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CA$193m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of CA$50m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Sherritt International insider transactions.

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.
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