Is Emerald Health Therapeutics (CVE:EMH) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Emerald Health Therapeutics, Inc. (CVE:EMH) does use debt in its business. But the real question is whether this debt is making the company risky.

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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Emerald Health Therapeutics

What Is Emerald Health Therapeutics's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Emerald Health Therapeutics had debt of CA$24.2m, up from CA$21.9m in one year. However, its balance sheet shows it holds CA$68.7m in cash, so it actually has CA$44.4m net cash.

How Strong Is Emerald Health Therapeutics' Balance Sheet?

According to the last reported balance sheet, Emerald Health Therapeutics had liabilities of CA$26.9m due within 12 months, and liabilities of CA$27.4m due beyond 12 months. Offsetting these obligations, it had cash of CA$68.7m as well as receivables valued at CA$1.56m due within 12 months. So it can boast CA$15.8m more liquid assets than total liabilities.

This surplus liquidity suggests that Emerald Health Therapeutics' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Emerald Health Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Emerald Health Therapeutics will need earnings to service that debt. 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.

In the last year Emerald Health Therapeutics had a loss before interest and tax, and actually shrunk its revenue by 24%, to CA$13m. That makes us nervous, to say the least.

So How Risky Is Emerald Health Therapeutics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Emerald Health Therapeutics had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$9.9m of cash and made a loss of CA$125m. With only CA$44.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example Emerald Health Therapeutics has 4 warning signs (and 1 which is a bit concerning) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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