Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Emerald Holding, Inc. (NYSE:EEX) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Emerald Holding's Net Debt?
The chart below, which you can click on for greater detail, shows that Emerald Holding had US$516.6m in debt in December 2021; about the same as the year before. However, because it has a cash reserve of US$231.2m, its net debt is less, at about US$285.4m.
A Look At Emerald Holding's Liabilities
We can see from the most recent balance sheet that Emerald Holding had liabilities of US$190.1m falling due within a year, and liabilities of US$557.8m due beyond that. On the other hand, it had cash of US$231.2m and US$46.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$470.3m.
The deficiency here weighs heavily on the US$194.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Emerald Holding would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Emerald Holding 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.
In the last year Emerald Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to US$146m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Importantly, Emerald Holding had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$91m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of US$114m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Emerald Holding (of which 1 doesn't sit too well with us!) you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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.