Clean Seed Capital Group (CVE:CSX) Is Making Moderate Use Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Clean Seed Capital Group Ltd. (CVE:CSX) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Clean Seed Capital Group

What Is Clean Seed Capital Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Clean Seed Capital Group had CA$4.47m of debt, an increase on CA$3.01m, over one year. On the flip side, it has CA$237.2k in cash leading to net debt of about CA$4.23m.

How Strong 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$6.19m due within 12 months and liabilities of CA$2.04m due beyond that. On the other hand, it had cash of CA$237.2k and CA$40.7k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$7.95m.

This is a mountain of leverage relative to its market capitalization of CA$12.5m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year Clean Seed Capital Group wasn't profitable at an EBIT level, but managed to grow its revenue by 17,029%, to CA$1.3m. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Even though Clean Seed Capital Group managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping CA$2.2m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$2.3m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. Case in point: We've spotted 5 warning signs for Clean Seed Capital Group you should be aware of, and 4 of them shouldn't be ignored.

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.