Ecolomondo (CVE:ECM) Has Debt But No Earnings; Should You Worry?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Ecolomondo Corporation (CVE:ECM) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Ecolomondo

How Much Debt Does Ecolomondo Carry?

As you can see below, at the end of June 2024, Ecolomondo had CA$41.2m of debt, up from CA$36.0m a year ago. Click the image for more detail. Net debt is about the same, since the it doesn't have much cash.

A Look At Ecolomondo's Liabilities

According to the last reported balance sheet, Ecolomondo had liabilities of CA$7.97m due within 12 months, and liabilities of CA$38.7m due beyond 12 months. Offsetting this, it had CA$161.2k in cash and CA$279.9k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$46.2m.

Given this deficit is actually higher than the company's market capitalization of CA$38.1m, we think shareholders really should watch Ecolomondo's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ecolomondo will need earnings to service that debt. 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 Ecolomondo can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

Caveat Emptor

Importantly, Ecolomondo had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$3.0m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CA$3.5m in negative free cash flow over the last year. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Ecolomondo is showing 4 warning signs in our investment analysis , and 2 of those shouldn't be ignored...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.