Yahoo Finance Is Smart Employee Benefits (CVE:SEB) Using Too Much Debt?
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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Smart Employee Benefits Inc. (CVE:SEB) does carry debt. But the more important question is: how much risk is that debt creating?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Smart Employee Benefits
What Is Smart Employee Benefits's Debt?
As you can see below, Smart Employee Benefits had CA$26.1m of debt at May 2019, down from CA$27.4m a year prior. On the flip side, it has CA$1.00m in cash leading to net debt of about CA$25.1m.
How Strong Is Smart Employee Benefits's Balance Sheet?
The latest balance sheet data shows that Smart Employee Benefits had liabilities of CA$56.6m due within a year, and liabilities of CA$1.39m falling due after that. On the other hand, it had cash of CA$1.00m and CA$16.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$40.8m.
The deficiency here weighs heavily on the CA$26.5m 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'd watch its balance sheet closely, without a doubt After all, Smart Employee Benefits would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Smart Employee Benefits will need earnings to service that debt. 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 Smart Employee Benefits actually shrunk its revenue by 4.4%, to CA$71m. We would much prefer see growth.
Caveat Emptor
Over the last twelve months Smart Employee Benefits produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$6.3m at the EBIT level. 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. It's fair to say the loss of-CA$13.5m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Smart Employee Benefits insider transactions.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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