Clean Seed Capital Group (CVE:CSX) Is Carrying A Fair Bit Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Clean Seed Capital Group Ltd. (CVE:CSX) does carry debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Clean Seed Capital Group

What Is Clean Seed Capital Group's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Clean Seed Capital Group had debt of CA$2.72m, up from CA$2.48m in one year. However, it also had CA$110.5k in cash, and so its net debt is CA$2.61m.

How Healthy Is Clean Seed Capital Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Clean Seed Capital Group had liabilities of CA$3.49m due within 12 months and liabilities of CA$992.0k due beyond that. Offsetting these obligations, it had cash of CA$110.5k as well as receivables valued at CA$28.4k due within 12 months. So its liabilities total CA$4.34m more than the combination of its cash and short-term receivables.

Since publicly traded Clean Seed Capital Group shares are worth a total of CA$29.1m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Clean Seed Capital Group's earnings that will influence how the balance sheet holds up in the future. 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 Clean Seed Capital Group can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

Caveat Emptor

Not only did Clean Seed Capital Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CA$3.0m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$3.8m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. To that end, you should learn about the 4 warning signs we've spotted with Clean Seed Capital Group (including 2 which are potentially serious) .

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.