Is Charlotte's Web Holdings (TSE:CWEB) Using Too Much Debt?

Warren Buffett famously said, '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. We can see that Charlotte's Web Holdings, Inc. (TSE:CWEB) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Charlotte's Web Holdings

How Much Debt Does Charlotte's Web Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Charlotte's Web Holdings had US$40.3m of debt, an increase on none, over one year. But on the other hand it also has US$61.7m in cash, leading to a US$21.4m net cash position.

A Look At Charlotte's Web Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Charlotte's Web Holdings had liabilities of US$22.6m due within 12 months and liabilities of US$75.6m due beyond that. Offsetting these obligations, it had cash of US$61.7m as well as receivables valued at US$2.48m due within 12 months. So it has liabilities totalling US$34.0m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$43.9m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Charlotte's Web Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Charlotte's Web Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Charlotte's Web Holdings made a loss at the EBIT level, and saw its revenue drop to US$69m, which is a fall of 21%. That makes us nervous, to say the least.

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$6.2m of cash and made a loss of US$43m. With only US$21.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 4 warning signs we've spotted with Charlotte's Web Holdings .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.