Charlotte's Web Holdings (TSE:CWEB) 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.' 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, Charlotte's Web Holdings, Inc. (TSE:CWEB) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

Check out our latest analysis for Charlotte's Web Holdings

What Is Charlotte's Web Holdings's Net Debt?

As you can see below, at the end of March 2023, Charlotte's Web Holdings had US$38.4m of debt, up from none a year ago. Click the image for more detail. But it also has US$60.8m in cash to offset that, meaning it has US$22.4m net cash.

A Look At Charlotte's Web Holdings' Liabilities

According to the last reported balance sheet, Charlotte's Web Holdings had liabilities of US$22.6m due within 12 months, and liabilities of US$78.4m due beyond 12 months. Offsetting these obligations, it had cash of US$60.8m as well as receivables valued at US$6.84m due within 12 months. So it has liabilities totalling US$33.5m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of US$29.3m, we think shareholders really should watch Charlotte's Web Holdings's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Charlotte's Web Holdings boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. 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 Charlotte's Web Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Charlotte's Web Holdings made a loss at the EBIT level, and saw its revenue drop to US$72m, which is a fall of 22%. To be frank that doesn't bode well.

So How Risky Is Charlotte's Web Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Charlotte's Web Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$7.0m of cash and made a loss of US$54m. With only US$22.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Charlotte's Web Holdings is showing 3 warning signs in our investment analysis , you should know about...

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.