Does Cielo Waste Solutions (CVE:CMC) Have A Healthy Balance Sheet?

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.' 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 can see that Cielo Waste Solutions Corp. (CVE:CMC) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Cielo Waste Solutions

What Is Cielo Waste Solutions's Debt?

The image below, which you can click on for greater detail, shows that at October 2022 Cielo Waste Solutions had debt of CA$13.4m, up from CA$11.1m in one year. However, it does have CA$3.77m in cash offsetting this, leading to net debt of about CA$9.59m.

A Look At Cielo Waste Solutions' Liabilities

Zooming in on the latest balance sheet data, we can see that Cielo Waste Solutions had liabilities of CA$7.24m due within 12 months and liabilities of CA$10.5m due beyond that. Offsetting these obligations, it had cash of CA$3.77m as well as receivables valued at CA$422.0k due within 12 months. So it has liabilities totalling CA$13.6m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Cielo Waste Solutions has a market capitalization of CA$37.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Cielo Waste Solutions'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.

Since Cielo Waste Solutions doesn't have significant operating revenue, shareholders must hope it'll sell some fossil fuels, before it runs out of money.

Caveat Emptor

Over the last twelve months Cielo Waste Solutions produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$10m. 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. Another cause for caution is that is bled CA$15m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Cielo Waste Solutions is showing 5 warning signs in our investment analysis , and 3 of those are a bit unpleasant...

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.

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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.