Is Cellnet Group (ASX:CLT) Using Too Much 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. Importantly, Cellnet Group Limited (ASX:CLT) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Cellnet Group

How Much Debt Does Cellnet Group Carry?

The image below, which you can click on for greater detail, shows that Cellnet Group had debt of AU$4.94m at the end of June 2022, a reduction from AU$8.36m over a year. However, its balance sheet shows it holds AU$6.47m in cash, so it actually has AU$1.54m net cash.

A Look At Cellnet Group's Liabilities

The latest balance sheet data shows that Cellnet Group had liabilities of AU$20.6m due within a year, and liabilities of AU$593.0k falling due after that. Offsetting these obligations, it had cash of AU$6.47m as well as receivables valued at AU$9.35m due within 12 months. So it has liabilities totalling AU$5.37m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of AU$6.80m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Cellnet Group also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Cellnet 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.

Over 12 months, Cellnet Group made a loss at the EBIT level, and saw its revenue drop to AU$79m, which is a fall of 18%. We would much prefer see growth.

So How Risky Is Cellnet Group?

Although Cellnet Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of AU$4.2m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Cellnet Group that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.