CFOAM (ASX:CFO) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 CFOAM Limited (ASX:CFO) makes use of debt. But the real question is whether this debt is making the company risky.

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 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for CFOAM

What Is CFOAM's Net Debt?

The image below, which you can click on for greater detail, shows that CFOAM had debt of US$4.11m at the end of December 2020, a reduction from US$6.35m over a year. However, it does have US$984.3k in cash offsetting this, leading to net debt of about US$3.12m.

How Strong Is CFOAM's Balance Sheet?

We can see from the most recent balance sheet that CFOAM had liabilities of US$1.90m falling due within a year, and liabilities of US$2.45m due beyond that. Offsetting this, it had US$984.3k in cash and US$161.7k in receivables that were due within 12 months. So it has liabilities totalling US$3.20m more than its cash and near-term receivables, combined.

This deficit isn't so bad because CFOAM is worth US$11.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is CFOAM's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, CFOAM made a loss at the EBIT level, and saw its revenue drop to US$720k, which is a fall of 16%. That's not what we would hope to see.

Caveat Emptor

Not only did CFOAM's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$3.2m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$2.7m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 6 warning signs for CFOAM (4 are a bit concerning) you should be aware of.

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.

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