Answear.com (WSE:ANR) 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, Answear.com S.A. (WSE:ANR) does carry debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Answear.com

What Is Answear.com's Debt?

As you can see below, at the end of September 2024, Answear.com had zł187.6m of debt, up from zł137.6m a year ago. Click the image for more detail. However, because it has a cash reserve of zł17.0m, its net debt is less, at about zł170.6m.

How Healthy Is Answear.com's Balance Sheet?

The latest balance sheet data shows that Answear.com had liabilities of zł536.6m due within a year, and liabilities of zł142.4m falling due after that. Offsetting this, it had zł17.0m in cash and zł93.0m in receivables that were due within 12 months. So it has liabilities totalling zł569.0m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of zł536.0m, we think shareholders really should watch Answear.com'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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Answear.com 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 Answear.com wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to zł1.4b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Answear.com had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at zł6.6m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of zł15m. In the meantime, we consider the stock to be risky. 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. We've identified 2 warning signs with Answear.com (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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.