Is Canadian Premium Sand (CVE:CPS) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Canadian Premium Sand Inc. (CVE:CPS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. 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 Canadian Premium Sand

What Is Canadian Premium Sand's Debt?

As you can see below, at the end of December 2022, Canadian Premium Sand had CA$2.69m of debt, up from CA$2.34m a year ago. Click the image for more detail. However, its balance sheet shows it holds CA$5.69m in cash, so it actually has CA$3.00m net cash.

How Healthy Is Canadian Premium Sand's Balance Sheet?

The latest balance sheet data shows that Canadian Premium Sand had liabilities of CA$1.84m due within a year, and liabilities of CA$2.77m falling due after that. Offsetting this, it had CA$5.69m in cash and CA$29.4k in receivables that were due within 12 months. So it can boast CA$1.11m more liquid assets than total liabilities.

This surplus suggests that Canadian Premium Sand has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Canadian Premium Sand boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Canadian Premium Sand'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, Canadian Premium Sand shareholders no doubt hope it can fund itself until it can sell some combustibles.

So How Risky Is Canadian Premium Sand?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Canadian Premium Sand had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CA$6.9m and booked a CA$8.1m accounting loss. With only CA$3.00m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Canadian Premium Sand (of which 3 are concerning!) 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.