Is Cielo Waste Solutions (CSE:CMC) A Risky Investment?

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 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. Importantly, Cielo Waste Solutions Corp. (CSE:CMC) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Cielo Waste Solutions

What Is Cielo Waste Solutions's Net Debt?

The chart below, which you can click on for greater detail, shows that Cielo Waste Solutions had CA$8.59m in debt in January 2021; about the same as the year before. However, it also had CA$266.0k in cash, and so its net debt is CA$8.33m.

How Healthy Is Cielo Waste Solutions' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cielo Waste Solutions had liabilities of CA$5.94m due within 12 months and liabilities of CA$7.88m due beyond that. Offsetting these obligations, it had cash of CA$266.0k as well as receivables valued at CA$472.7k due within 12 months. So its liabilities total CA$13.1m more than the combination of its cash and short-term receivables.

Since publicly traded Cielo Waste Solutions shares are worth a total of CA$535.0m, 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 Cielo Waste Solutions'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.

Given it has no significant operating revenue at the moment, shareholders will be hoping Cielo Waste Solutions can make progress and gain better traction for the business, before it runs low on cash.

Caveat Emptor

While Cielo Waste Solutions's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CA$3.8m. 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$8.3m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 6 warning signs for Cielo Waste Solutions (of which 4 are potentially serious!) you should know about.

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. 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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