CleanSpace Holdings (ASX:CSX) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that CleanSpace Holdings Limited (ASX:CSX) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for CleanSpace Holdings

What Is CleanSpace Holdings's Net Debt?

The chart below, which you can click on for greater detail, shows that CleanSpace Holdings had AU$2.80m in debt in June 2024; about the same as the year before. But on the other hand it also has AU$9.80m in cash, leading to a AU$7.00m net cash position.

A Look At CleanSpace Holdings' Liabilities

We can see from the most recent balance sheet that CleanSpace Holdings had liabilities of AU$5.50m falling due within a year, and liabilities of AU$1.40m due beyond that. On the other hand, it had cash of AU$9.80m and AU$4.50m worth of receivables due within a year. So it actually has AU$7.40m more liquid assets than total liabilities.

It's good to see that CleanSpace Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that CleanSpace Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since CleanSpace Holdings will need earnings to service that debt. 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.

In the last year CleanSpace Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 30%, to AU$16m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is CleanSpace Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months CleanSpace Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$6.0m of cash and made a loss of AU$3.1m. However, it has net cash of AU$7.00m, so it has a bit of time before it will need more capital. CleanSpace 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. Pre-profit companies are often risky, but they can also offer great rewards. 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. For instance, we've identified 3 warning signs for CleanSpace Holdings (2 are concerning) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.