Yahoo Finance Is Sherritt International (TSE:S) A Risky Investment?
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, Sherritt International Corporation (TSE:S) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Sherritt International
What Is Sherritt International's Debt?
The chart below, which you can click on for greater detail, shows that Sherritt International had CA$705.9m in debt in June 2019; about the same as the year before. However, it does have CA$176.8m in cash offsetting this, leading to net debt of about CA$529.1m.
A Look At Sherritt International's Liabilities
We can see from the most recent balance sheet that Sherritt International had liabilities of CA$309.9m falling due within a year, and liabilities of CA$696.3m due beyond that. On the other hand, it had cash of CA$176.8m and CA$162.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$666.9m.
This deficit casts a shadow over the CA$91.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt At the end of the day, Sherritt International 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 ultimately the future profitability of the business will decide if Sherritt International 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.
Over 12 months, Sherritt International saw its revenue drop to CA$145m, which is a fall of 29%. That makes us nervous, to say the least.
Caveat Emptor
While Sherritt International's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CA$60m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the fact is that it incinerated CA$29m of cash in the last twelve months, and has precious few liquid assets in comparison to its liabilities. So is this a high risk stock? We think so, and we'd avoid it like an anti-vaccine zealot with an obvious case of measles. For riskier companies like Sherritt International I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
