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.’ 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. As with many other companies Clean TeQ Holdings Limited (ASX:CLQ) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.
What Is Clean TeQ Holdings’s Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Clean TeQ Holdings had debt of AU$137.0k, up from none in one year. However, it does have AU$79.0m in cash offsetting this, leading to net cash of AU$78.8m.
A Look At Clean TeQ Holdings’s Liabilities
We can see from the most recent balance sheet that Clean TeQ Holdings had liabilities of AU$12.1m falling due within a year, and liabilities of AU$885.0k due beyond that. Offsetting this, it had AU$79.0m in cash and AU$18.4m in receivables that were due within 12 months. So it actually has AU$84.4m more liquid assets than total liabilities.
This surplus suggests that Clean TeQ Holdings is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don’t think it will have any issues with its lenders. Simply put, the fact that Clean TeQ Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Clean TeQ Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Clean TeQ Holdings reported revenue of AU$7.7m, which is a gain of 30%. With any luck the company will be able to grow its way to profitability.
So How Risky Is Clean TeQ Holdings?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Clean TeQ Holdings had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through AU$74m of cash and made a loss of AU$18m. However, it has net cash of AU$79m, so it has a bit of time before it will need more capital. Clean TeQ Holdings’s revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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 Clean TeQ Holdings insider transactions.
Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.