Is Carbonxt Group (ASX:CG1) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Carbonxt Group Limited (ASX:CG1) does have debt on its balance sheet. 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. 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. 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 examine debt levels, we first consider both cash and debt levels, 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 December 2022 Carbonxt Group had AU$5.39m of debt, an increase on AU$5.03m, over one year. However, it does have AU$6.17m in cash offsetting this, leading to net cash of AU$770.7k.

How Healthy Is Carbonxt Group's Balance Sheet?

According to the last reported balance sheet, Carbonxt Group had liabilities of AU$8.89m due within 12 months, and liabilities of AU$546.3k due beyond 12 months. On the other hand, it had cash of AU$6.17m and AU$1.52m worth of receivables due within a year. So it has liabilities totalling AU$1.76m more than its cash and near-term receivables, combined.

Given Carbonxt Group has a market capitalization of AU$22.0m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Carbonxt Group also has more cash than debt, so we're pretty confident it can manage its debt safely. 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.

In the last year Carbonxt Group wasn't profitable at an EBIT level, but managed to grow its revenue by 15%, to AU$17m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Carbonxt Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Carbonxt Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through AU$5.0m of cash and made a loss of AU$5.1m. Given it only has net cash of AU$770.7k, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Carbonxt Group (of which 2 can't be ignored!) you should know about.

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.

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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.