Does Emergia (CSE:EMER) use debt in a risky way?
Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Like many other companies Emergia Inc. (CSE:EMER) uses debt. But does this debt worry shareholders?
Why is debt risky?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest analysis for Emergia
What is Emergia’s debt?
You can click on the chart below for historical numbers, but it shows Emergia had C$49.1 million in debt in September 2021, up from C$60.9 million a year prior. Net debt is about the same, since she doesn’t have a lot of cash.
How strong is Emergia’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Emergia had liabilities of C$16.4 million due within 12 months and liabilities of C$39.3 million due beyond. In compensation for these obligations, it had cash of CA$36.0 k as well as receivables valued at CA$34.0 k maturing within 12 months. It therefore has liabilities totaling C$55.6 million more than its cash and short-term receivables, combined.
This deficit casts a shadow over the C$33.9 million business, like a colossus towering above mere mortals. So we definitely think shareholders need to watch this one closely. Ultimately, Emergia would likely need a major recapitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when analyzing debt. But it is Emergia’s earnings that will influence the balance sheet in the future. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Over 12 months, Emergia recorded a loss in EBIT, and saw its turnover fall to C$934k, a drop of 68%. To be honest, that doesn’t bode well.
Not only has Emergia’s revenue dropped over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). Indeed, it lost C$2.4 million in EBIT. Considering that alongside the liabilities mentioned above, we are nervous about the business. It would have to quickly improve its functioning so that we are interested in it. It’s fair to say that the loss of C$22 million didn’t cheer us up either; we would like to see a profit. And until then, we think it’s a risky stock. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 4 warning signs for Emergia (3 of which are concerning!) that you should know about.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.