Health Check: How Prudently Does Creatd (NASDAQ:CRTD) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Creatd Inc. (NASDAQ:CRTD) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Creatd

What Is Creatd's Debt?

As you can see below, Creatd had US$1.62m of debt at September 2020, down from US$7.26m a year prior. However, it does have US$3.10m in cash offsetting this, leading to net cash of US$1.48m.

How Strong Is Creatd's Balance Sheet?

The latest balance sheet data shows that Creatd had liabilities of US$2.74m due within a year, and liabilities of US$578.4k falling due after that. Offsetting this, it had US$3.10m in cash and US$101.8k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$121.4k.

Having regard to Creatd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$25.1m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Creatd 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 it is future earnings, more than anything, that will determine Creatd'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, Creatd reported revenue of US$1.4m, which is a gain of 797%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Creatd?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Creatd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$6.3m and booked a US$23m accounting loss. Given it only has net cash of US$1.48m, the company may need to raise more capital if it doesn't reach break-even soon. The good news for shareholders is that Creatd has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 6 warning signs with Creatd (at least 2 which make us uncomfortable) , and understanding them should be part of your investment process.

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.

If you decide to trade Creatd, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.