Would CHAR Technologies (CVE:YES) Be Better Off With Less Debt?

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 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 note that CHAR Technologies Ltd. (CVE:YES) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

We've discovered 5 warning signs about CHAR Technologies. View them for free.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is CHAR Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 CHAR Technologies had CA$2.62m of debt, an increase on CA$2.51m, over one year. On the flip side, it has CA$1.58m in cash leading to net debt of about CA$1.05m.

How Healthy Is CHAR Technologies' Balance Sheet?

According to the last reported balance sheet, CHAR Technologies had liabilities of CA$3.65m due within 12 months, and liabilities of CA$8.99m due beyond 12 months. Offsetting this, it had CA$1.58m in cash and CA$1.24m in receivables that were due within 12 months. So its liabilities total CA$9.82m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since CHAR Technologies has a market capitalization of CA$26.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since CHAR Technologies 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.

See our latest analysis for CHAR Technologies

In the last year CHAR Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 92%, to CA$3.3m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate CHAR Technologies's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping CA$7.0m. 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. Another cause for caution is that is bled CA$6.8m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For example, we've discovered 5 warning signs for CHAR Technologies (2 are significant!) 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.

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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.