CuFe (ASX:CUF) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that CuFe Ltd. (ASX:CUF) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for CuFe

How Much Debt Does CuFe Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 CuFe had AU$2.09m of debt, an increase on none, over one year. But it also has AU$8.19m in cash to offset that, meaning it has AU$6.11m net cash.

How Strong Is CuFe's Balance Sheet?

We can see from the most recent balance sheet that CuFe had liabilities of AU$8.75m falling due within a year, and liabilities of AU$711.0k due beyond that. Offsetting this, it had AU$8.19m in cash and AU$1.94m in receivables that were due within 12 months. So it actually has AU$668.2k more liquid assets than total liabilities.

This short term liquidity is a sign that CuFe could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, CuFe boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since CuFe will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

While it hasn't made a profit, at least CuFe booked its first revenue as a publicly listed company, in the last twelve months.

So How Risky Is CuFe?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that CuFe had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$9.1m and booked a AU$1.2m accounting loss. But at least it has AU$6.11m on the balance sheet to spend on growth, near-term. Importantly, CuFe's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with CuFe , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.