Is Clean Seed Capital Group (CVE:CSX) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Clean Seed Capital Group Ltd. (CVE:CSX) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

Check out our latest analysis for Clean Seed Capital Group

What Is Clean Seed Capital Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Clean Seed Capital Group had CA$3.72m of debt, an increase on CA$2.72m, over one year. And it doesn't have much cash, so its net debt is about the same.

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$4.65m due within 12 months and liabilities of CA$2.10m due beyond that. On the other hand, it had cash of CA$54.8k and CA$48.8k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$6.64m.

Clean Seed Capital Group has a market capitalization of CA$22.4m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

Over 12 months, Clean Seed Capital Group reported revenue of CA$1.3m, which is a gain of 17,029%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

While we can certainly appreciate Clean Seed Capital Group's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CA$2.0m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CA$2.9m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. 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 3 of them don't sit too well with us.

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.