Warren Buffett famously said, ‘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, Calian Group Ltd. (TSE:CGY) does carry 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest analysis for Calian Group
What Is Calian Group’s Debt?
As you can see below, at the end of June 2019, Calian Group had CA$12.0m of debt, up from a year ago. Click the image for more detail. However, it does have CA$18.0m in cash offsetting this, leading to net cash of CA$5.99m.
How Strong Is Calian Group’s Balance Sheet?
According to the last reported balance sheet, Calian Group had liabilities of CA$68.8m due within 12 months, and liabilities of CA$11.3m due beyond 12 months. Offsetting these obligations, it had cash of CA$18.0m as well as receivables valued at CA$93.7m due within 12 months. So it can boast CA$31.7m more liquid assets than total liabilities.
This short term liquidity is a sign that Calian Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Calian Group boasts net cash, so it’s fair to say it does not have a heavy debt load!
On the other hand, Calian Group saw its EBIT drop by 4.4% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Calian Group can strengthen its balance sheet over time. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Calian Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Calian Group produced sturdy free cash flow equating to 65% of its EBIT, about what we’d expect. This cold hard cash means it can reduce its debt when it wants to.
Summing up
While it is always sensible to investigate a company’s debt, in this case Calian Group has CA$5.99m in net cash and a decent-looking balance sheet. So is Calian Group’s debt a risk? It doesn’t seem so to us. We’d be motivated to research the stock further if we found out that Calian Group insiders have bought shares recently. If you would too, then you’re in luck, since today we’re sharing our list of reported insider transactions for free.
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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