Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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. We can see that Emerald Holding, Inc. (NYSE:EEX) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
How Much Debt Does Emerald Holding Carry?
The chart below, which you can click on for greater detail, shows that Emerald Holding had US$518.8m in debt in June 2021; about the same as the year before. However, it does have US$302.8m in cash offsetting this, leading to net debt of about US$216.0m.
A Look At Emerald Holding’s Liabilities
Zooming in on the latest balance sheet data, we can see that Emerald Holding had liabilities of US$171.6m due within 12 months and liabilities of US$542.2m due beyond that. Offsetting these obligations, it had cash of US$302.8m as well as receivables valued at US$41.6m due within 12 months. So its liabilities total US$369.4m more than the combination of its cash and short-term receivables.
Given this deficit is actually higher than the company’s market capitalization of US$329.1m, we think shareholders really should watch Emerald Holding’s debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Emerald Holding’s earnings that will influence how the balance sheet holds up in the future.
Over 12 months, Emerald Holding made a loss at the EBIT level, and saw its revenue drop to US$49m, which is a fall of 79%. That makes us nervous, to say the least.
While Emerald Holding’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 US$141m. 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$164m didn’t encourage us either; we’d like to see a profit. In the meantime, we consider the stock to be risky.