Cielo Waste Solutions (CVE:CMC) Is Carrying A Fair Bit Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Cielo Waste Solutions Corp. (CVE:CMC) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, 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.

Check out our latest analysis for Cielo Waste Solutions

How Much Debt Does Cielo Waste Solutions Carry?

As you can see below, at the end of January 2022, Cielo Waste Solutions had CA$11.4m of debt, up from CA$8.59m a year ago. Click the image for more detail. However, it also had CA$2.52m in cash, and so its net debt is CA$8.89m.

How Strong Is Cielo Waste Solutions' Balance Sheet?

The latest balance sheet data shows that Cielo Waste Solutions had liabilities of CA$14.5m due within a year, and liabilities of CA$3.62m falling due after that. Offsetting these obligations, it had cash of CA$2.52m as well as receivables valued at CA$461.7k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$15.1m.

Of course, Cielo Waste Solutions has a market capitalization of CA$162.3m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Cielo Waste Solutions can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Given its lack of meaningful operating revenue, Cielo Waste Solutions shareholders no doubt hope it can fund itself until it can sell some combustibles.

Caveat Emptor

While Cielo Waste Solutions'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$14m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$32m 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 5 warning signs for Cielo Waste Solutions (3 shouldn't be ignored!) 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.