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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Cielo Waste Solutions Corp. (CVE:CMC) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Cielo Waste Solutions

How Much Debt Does Cielo Waste Solutions Carry?

The image below, which you can click on for greater detail, shows that at July 2024 Cielo Waste Solutions had debt of CA$4.52m, up from CA$1.99m in one year. And it doesn't have much cash, so its net debt is about the same.

How Healthy Is Cielo Waste Solutions' Balance Sheet?

The latest balance sheet data shows that Cielo Waste Solutions had liabilities of CA$10.2m due within a year, and liabilities of CA$2.36m falling due after that. Offsetting this, it had CA$24.0k in cash and CA$63.0k in receivables that were due within 12 months. So it has liabilities totalling CA$12.5m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CA$19.8m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is Cielo Waste Solutions'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.

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

Importantly, Cielo Waste Solutions had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$8.0m. 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$5.6m 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that Cielo Waste Solutions is showing 6 warning signs in our investment analysis , and 4 of those are concerning...

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.