Is Emerge Commerce (CVE:ECOM) Using Debt Sensibly?

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. As with many other companies Emerge Commerce Ltd. (CVE:ECOM) makes use of debt. But is this debt a concern to shareholders?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Emerge Commerce

What Is Emerge Commerce's Debt?

The image below, which you can click on for greater detail, shows that Emerge Commerce had debt of CA$18.1m at the end of September 2023, a reduction from CA$25.0m over a year. On the flip side, it has CA$2.25m in cash leading to net debt of about CA$15.9m.

How Healthy Is Emerge Commerce's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Emerge Commerce had liabilities of CA$26.7m due within 12 months and liabilities of CA$6.11m due beyond that. Offsetting these obligations, it had cash of CA$2.25m as well as receivables valued at CA$1.16m due within 12 months. So it has liabilities totalling CA$29.4m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CA$5.57m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Emerge Commerce 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 you can't view debt in total isolation; since Emerge Commerce will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Emerge Commerce reported revenue of CA$52m, which is a gain of 35%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Emerge Commerce managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable CA$3.9m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost CA$20m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. 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. We've identified 4 warning signs with Emerge Commerce (at least 3 which are significant) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.