Health Check: How Prudently Does Emerald Holding (NYSE:EEX) 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Emerald Holding, Inc. (NYSE:EEX) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Emerald Holding

How Much Debt Does Emerald Holding Carry?

As you can see below, Emerald Holding had US$513.3m of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. However, it also had US$366.1m in cash, and so its net debt is US$147.2m.

How Healthy Is Emerald Holding's Balance Sheet?

The latest balance sheet data shows that Emerald Holding had liabilities of US$303.2m due within a year, and liabilities of US$531.3m falling due after that. Offsetting this, it had US$366.1m in cash and US$82.8m in receivables that were due within 12 months. So its liabilities total US$385.6m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$236.7m 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. There's no doubt that we learn most about debt from the balance sheet. But it is Emerald Holding's earnings that will influence how the balance sheet holds up in the future. 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 Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 134%, to US$273m. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Even though Emerald Holding managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping US$38m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. But on the bright side the company actually produced a statutory profit of US$11m and free cash flow of US$242m. So there is definitely a chance that it can improve things in the next few years. 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. Case in point: We've spotted 1 warning sign for Emerald Holding you should be aware of.

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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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.