Is Carnegie Clean Energy (ASX:CCE) Using Debt In A Risky Way?

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.' 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 Carnegie Clean Energy Limited (ASX:CCE) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Carnegie Clean Energy

How Much Debt Does Carnegie Clean Energy Carry?

You can click the graphic below for the historical numbers, but it shows that Carnegie Clean Energy had AU$2.83m of debt in June 2020, down from AU$6.04m, one year before. However, its balance sheet shows it holds AU$3.41m in cash, so it actually has AU$589.7k net cash.

How Healthy Is Carnegie Clean Energy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Carnegie Clean Energy had liabilities of AU$3.24m due within 12 months and liabilities of AU$100.4k due beyond that. On the other hand, it had cash of AU$3.41m and AU$169.8k worth of receivables due within a year. So it actually has AU$239.5k more liquid assets than total liabilities.

This state of affairs indicates that Carnegie Clean Energy's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the AU$17.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Carnegie Clean Energy 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 Carnegie Clean Energy 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.

It seems likely shareholders hope that Carnegie Clean Energy can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

So How Risky Is Carnegie Clean Energy?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Carnegie Clean Energy had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through AU$2.1m of cash and made a loss of AU$1.8m. With only AU$589.7k on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the 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. For example, we've discovered 5 warning signs for Carnegie Clean Energy (3 are a bit concerning!) that you should be aware of before investing here.

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. 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.
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