Stock Analysis

We Think Ecolomondo (CVE:ECM) Has A Fair Chunk Of Debt

TSXV:ECM
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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Ecolomondo Corporation (CVE:ECM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Ecolomondo

What Is Ecolomondo's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Ecolomondo had debt of CA$34.7m, up from CA$31.9m in one year. Net debt is about the same, since the it doesn't have much cash.

debt-equity-history-analysis
TSXV:ECM Debt to Equity History September 28th 2023

A Look At Ecolomondo's Liabilities

The latest balance sheet data shows that Ecolomondo had liabilities of CA$6.11m due within a year, and liabilities of CA$35.5m falling due after that. Offsetting these obligations, it had cash of CA$391.1k as well as receivables valued at CA$111.7k due within 12 months. So it has liabilities totalling CA$41.1m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CA$61.3m, so it does suggest shareholders should keep an eye on Ecolomondo's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Ecolomondo will need earnings to service that debt. 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. Indeed, it lost CA$1.6m at the EBIT level. 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$4.3m of cash over the last year. So suffice it to say we consider the stock very 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 3 warning signs for Ecolomondo (2 are a bit unpleasant!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Valuation is complex, but we're helping make it simple.

Find out whether Ecolomondo is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.