Is Cielo Waste Solutions (CVE:CMC) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Cielo Waste Solutions

What Is Cielo Waste Solutions's Net Debt?

The image below, which you can click on for greater detail, shows that at January 2023 Cielo Waste Solutions had debt of CA$13.8m, up from CA$11.4m in one year. On the flip side, it has CA$3.17m in cash leading to net debt of about CA$10.6m.

How Healthy Is Cielo Waste Solutions' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cielo Waste Solutions had liabilities of CA$9.53m due within 12 months and liabilities of CA$9.89m due beyond that. Offsetting this, it had CA$3.17m in cash and CA$143.0k in receivables that were due within 12 months. So its liabilities total CA$16.1m more than the combination of its cash and short-term receivables.

Cielo Waste Solutions has a market capitalization of CA$41.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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

Over the last twelve months Cielo Waste Solutions produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$8.2m. 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$14m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for Cielo Waste Solutions you should be aware of, and 3 of them don't sit too well with us.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.