Ecolomondo (CVE:ECM) Is Making Moderate Use Of Debt

By
Simply Wall St
Published
July 09, 2021
TSXV:ECM
Source: Shutterstock

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Ecolomondo Corporation (CVE:ECM) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Ecolomondo

How Much Debt Does Ecolomondo Carry?

The image below, which you can click on for greater detail, shows that at March 2021 Ecolomondo had debt of CA$28.8m, up from CA$8.65m in one year. However, it also had CA$5.91m in cash, and so its net debt is CA$22.9m.

debt-equity-history-analysis
TSXV:ECM Debt to Equity History July 10th 2021

How Strong Is Ecolomondo's Balance Sheet?

We can see from the most recent balance sheet that Ecolomondo had liabilities of CA$7.28m falling due within a year, and liabilities of CA$28.5m due beyond that. Offsetting this, it had CA$5.91m in cash and CA$368.1k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$29.5m.

Ecolomondo has a market capitalization of CA$63.8m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Ecolomondo'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 Ecolomondo can make progress and gain better traction for the business, before it runs low on cash.

Caveat Emptor

While Ecolomondo'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$1.7m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$18m of cash over the last year. So suffice it to say we consider the stock very risky. 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. For instance, we've identified 4 warning signs for Ecolomondo (1 is significant) you should be aware of.

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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