Is Ecolomondo (CVE:ECM) Using Debt Sensibly?

Warren Buffett famously said, '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. Importantly, Ecolomondo Corporation (CVE:ECM) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. 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

What Is Ecolomondo's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Ecolomondo had debt of CA$37.9m, up from CA$32.9m in one year. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Ecolomondo's Balance Sheet?

We can see from the most recent balance sheet that Ecolomondo had liabilities of CA$7.13m falling due within a year, and liabilities of CA$36.8m due beyond that. Offsetting this, it had CA$37.7k in cash and CA$136.2k in receivables that were due within 12 months. So it has liabilities totalling CA$43.8m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CA$51.9m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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

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$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. 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$1.7m of cash over the last year. 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. For example, we've discovered 4 warning signs for Ecolomondo (3 don't sit too well with us!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.