Is Ecolomondo (CVE:ECM) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Ecolomondo Corporation (CVE:ECM) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Ecolomondo

What Is Ecolomondo's Net Debt?

As you can see below, at the end of September 2024, Ecolomondo had CA$43.0m of debt, up from CA$37.9m a year ago. Click the image for more detail. On the flip side, it has CA$1.03m in cash leading to net debt of about CA$42.0m.

A Look At Ecolomondo's Liabilities

The latest balance sheet data shows that Ecolomondo had liabilities of CA$7.54m due within a year, and liabilities of CA$41.7m falling due after that. Offsetting these obligations, it had cash of CA$1.03m as well as receivables valued at CA$291.4k due within 12 months. So its liabilities total CA$47.9m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CA$29.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Ecolomondo would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Ecolomondo's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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

Over the last twelve months Ecolomondo produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$3.3m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of CA$4.5m over the last twelve months. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Ecolomondo is showing 6 warning signs in our investment analysis , and 3 of those are potentially serious...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.