Is Cielo Waste Solutions (CVE:CMC) Using Too Much 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Cielo Waste Solutions Corp. (CVE:CMC) does carry debt. But is this debt a concern to shareholders?

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, 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 October 2024 Cielo Waste Solutions had debt of CA$4.95m, up from CA$2.00m in one year. And it doesn't have much cash, so its net debt is about the same.

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$11.8m due within 12 months and liabilities of CA$1.78m due beyond that. Offsetting this, it had CA$7.0k in cash and CA$75.0k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$13.5m.

Given this deficit is actually higher than the company's market capitalization of CA$12.3m, we think shareholders really should watch Cielo Waste Solutions's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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 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$9.0m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of CA$4.9m over the last twelve months. So suffice it to say we consider the stock to be 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. Be aware that Cielo Waste Solutions is showing 4 warning signs in our investment analysis , you should know about...

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.