Here's Why Carbonxt Group (ASX:CG1) Can Afford Some Debt

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. We can see that Carbonxt Group Limited (ASX:CG1) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Carbonxt Group

What Is Carbonxt Group's Net Debt?

As you can see below, at the end of December 2020, Carbonxt Group had AU$4.75m of debt, up from AU$4.36m a year ago. Click the image for more detail. On the flip side, it has AU$1.79m in cash leading to net debt of about AU$2.96m.

How Strong Is Carbonxt Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Carbonxt Group had liabilities of AU$9.67m due within 12 months and liabilities of AU$2.83m due beyond that. On the other hand, it had cash of AU$1.79m and AU$1.39m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$9.32m.

Carbonxt Group has a market capitalization of AU$20.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Carbonxt Group made a loss at the EBIT level, and saw its revenue drop to AU$15m, which is a fall of 19%. We would much prefer see growth.

Caveat Emptor

While Carbonxt Group'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$5.5m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled AU$4.6m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with Carbonxt Group (including 1 which makes us a bit uncomfortable) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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