Is Cielo Waste Solutions (CVE:CMC) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its 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 Cielo Waste Solutions had debt of CA$9.86m at the end of April 2023, a reduction from CA$14.3m over a year. However, it does have CA$1.15m in cash offsetting this, leading to net debt of about CA$8.71m.

How Healthy Is Cielo Waste Solutions' Balance Sheet?

We can see from the most recent balance sheet that Cielo Waste Solutions had liabilities of CA$14.5m falling due within a year, and liabilities of CA$61.0k due beyond that. Offsetting these obligations, it had cash of CA$1.15m as well as receivables valued at CA$89.0k due within 12 months. So it has liabilities totalling CA$13.3m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Cielo Waste Solutions is worth CA$45.5m, and thus could probably raise enough capital to shore up 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Cielo Waste Solutions will need earnings to service that debt. 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

Importantly, Cielo Waste Solutions had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$6.8m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$9.0m in negative free cash flow over the last twelve months. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 6 warning signs for Cielo Waste Solutions (4 are concerning!) 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.