Does Cleantek Industries (CVE:CTEK) Have A Healthy Balance Sheet?

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.' 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 note that Cleantek Industries Inc. (CVE:CTEK) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Cleantek Industries

What Is Cleantek Industries's Debt?

The image below, which you can click on for greater detail, shows that Cleantek Industries had debt of CA$10.4m at the end of September 2023, a reduction from CA$10.9m over a year. However, it does have CA$549.0k in cash offsetting this, leading to net debt of about CA$9.87m.

How Healthy Is Cleantek Industries' Balance Sheet?

According to the last reported balance sheet, Cleantek Industries had liabilities of CA$11.8m due within 12 months, and liabilities of CA$2.10m due beyond 12 months. Offsetting this, it had CA$549.0k in cash and CA$3.02m in receivables that were due within 12 months. So it has liabilities totalling CA$10.3m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CA$5.55m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Cleantek Industries would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Cleantek Industries'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.

In the last year Cleantek Industries wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to CA$14m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Cleantek Industries produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$2.0m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of CA$649k. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Cleantek Industries that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.