Clean Seas Seafood (ASX:CSS) 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. We can see that Clean Seas Seafood Limited (ASX:CSS) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Clean Seas Seafood

What Is Clean Seas Seafood's Net Debt?

As you can see below, at the end of June 2020, Clean Seas Seafood had AU$22.4m of debt, up from AU$7.84m a year ago. Click the image for more detail. On the flip side, it has AU$22.2m in cash leading to net debt of about AU$278.0k.

How Healthy Is Clean Seas Seafood's Balance Sheet?

The latest balance sheet data shows that Clean Seas Seafood had liabilities of AU$18.5m due within a year, and liabilities of AU$15.7m falling due after that. On the other hand, it had cash of AU$22.2m and AU$2.97m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$9.12m.

Given Clean Seas Seafood has a market capitalization of AU$74.1m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, Clean Seas Seafood has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Clean Seas Seafood will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Clean Seas Seafood made a loss at the EBIT level, and saw its revenue drop to AU$40m, which is a fall of 13%. That's not what we would hope to see.

Caveat Emptor

While Clean Seas Seafood'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 AU$28m. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through AU$2.4m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for Clean Seas Seafood you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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