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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that Creatd Inc. (NASDAQ:CRTD) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Creatd's Net Debt?
As you can see below, Creatd had US$1.62m of debt at September 2020, down from US$7.26m a year prior. But it also has US$3.10m in cash to offset that, meaning it has US$1.48m net cash.
How Strong Is Creatd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Creatd had liabilities of US$2.74m due within 12 months and liabilities of US$578.4k due beyond that. Offsetting this, it had US$3.10m in cash and US$101.8k in receivables that were due within 12 months. So its liabilities total US$121.4k more than the combination of its cash and short-term receivables.
This state of affairs indicates that Creatd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$28.2m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Creatd also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Creatd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Creatd reported revenue of US$1.4m, which is a gain of 797%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
So How Risky Is Creatd?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Creatd lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$6.3m of cash and made a loss of US$23m. With only US$1.48m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Creatd's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 6 warning signs we've spotted with Creatd (including 2 which is can't be ignored) .
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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. 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.
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