Is Carbonxt Group (ASX:CG1) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Carbonxt Group

What Is Carbonxt Group's Debt?

As you can see below, at the end of June 2023, Carbonxt Group had AU$9.44m of debt, up from AU$5.21m a year ago. Click the image for more detail. On the flip side, it has AU$4.31m in cash leading to net debt of about AU$5.14m.

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$14.1m due within 12 months and liabilities of AU$3.38m due beyond that. Offsetting this, it had AU$4.31m in cash and AU$1.56m in receivables that were due within 12 months. So it has liabilities totalling AU$11.7m more than its cash and near-term receivables, combined.

Carbonxt Group has a market capitalization of AU$19.8m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Carbonxt Group 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 Carbonxt Group had a loss before interest and tax, and actually shrunk its revenue by 16%, to AU$15m. 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. Indeed, it lost a very considerable AU$4.8m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through AU$3.6m 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. For example - Carbonxt Group has 3 warning signs we think you should be aware of.

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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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.