Sherritt International (TSE:S) Has Debt But No Earnings; Should You Worry?

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.' 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. As with many other companies Sherritt International Corporation (TSE:S) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Sherritt International

What Is Sherritt International's Debt?

As you can see below, Sherritt International had CA$316.5m of debt at September 2023, down from CA$398.6m a year prior. However, it does have CA$120.4m in cash offsetting this, leading to net debt of about CA$196.1m.

How Healthy Is Sherritt International's Balance Sheet?

We can see from the most recent balance sheet that Sherritt International had liabilities of CA$238.6m falling due within a year, and liabilities of CA$466.1m due beyond that. Offsetting this, it had CA$120.4m in cash and CA$132.4m in receivables that were due within 12 months. So it has liabilities totalling CA$451.9m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CA$145.0m 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 definitely think shareholders need to watch this one closely. At the end of the day, Sherritt International would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year Sherritt International wasn't profitable at an EBIT level, but managed to grow its revenue by 42%, to CA$237m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Sherritt International's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable CA$60m at the EBIT level. 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$18m in the last year. So we think this stock is quite risky. We'd prefer to pass. 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 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.