Does Carbonxt Group (ASX:CG1) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Carbonxt Group Limited (ASX:CG1) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Carbonxt Group

What Is Carbonxt Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Carbonxt Group had AU$5.21m of debt, an increase on AU$4.85m, over one year. However, because it has a cash reserve of AU$1.09m, its net debt is less, at about AU$4.12m.

A Look At Carbonxt Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Carbonxt Group had liabilities of AU$10.2m due within 12 months and liabilities of AU$1.11m due beyond that. On the other hand, it had cash of AU$1.09m and AU$2.04m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$8.14m.

While this might seem like a lot, it is not so bad since Carbonxt Group has a market capitalization of AU$26.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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 Carbonxt Group'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.

In the last year Carbonxt Group wasn't profitable at an EBIT level, but managed to grow its revenue by 49%, to AU$18m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Carbonxt Group's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable AU$3.4m 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 AU$3.4m of cash over the last year. So suffice it to say we consider the stock very 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. Case in point: We've spotted 4 warning signs for Carbonxt Group you should be aware of, and 1 of them is concerning.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.