Auditors Are Concerned About World Class Extractions (CSE:PUMP)

The harsh reality for World Class Extractions Inc. (CSE:PUMP) shareholders is that its auditors, Dale Matheson Carr-Hilton, expressed doubts about its ability to continue as a going concern, in its reported results to January 2021. Thus we can say that, based on the results to that date, the company should raise capital or otherwise raise cash, without much delay.

Given its situation, it may not be in a good position to raise capital on favorable terms. So current risks on the balance sheet could have a big impact on how shareholders fare from here. The biggest concern we would have is the company's debt, since its lenders might force the company into administration if it cannot repay them.

Check out our latest analysis for World Class Extractions

What Is World Class Extractions's Net Debt?

As you can see below, at the end of January 2021, World Class Extractions had CA$2.61m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CA$3.02m in cash, so it actually has CA$408.9k net cash.

How Strong Is World Class Extractions' Balance Sheet?

We can see from the most recent balance sheet that World Class Extractions had liabilities of CA$5.59m falling due within a year, and liabilities of CA$911.3k due beyond that. On the other hand, it had cash of CA$3.02m and CA$2.27m worth of receivables due within a year. So its liabilities total CA$1.21m more than the combination of its cash and short-term receivables.

Of course, World Class Extractions has a market capitalization of CA$12.5m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, World Class Extractions also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since World Class Extractions 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.

In the last year World Class Extractions wasn't profitable at an EBIT level, but managed to grow its revenue by 2,867%, to CA$7.9m. That's virtually the hole-in-one of revenue growth!

So How Risky Is World Class Extractions?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months World Class Extractions lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$3.5m and booked a CA$10m accounting loss. Given it only has net cash of CA$408.9k, the company may need to raise more capital if it doesn't reach break-even soon. The good news for shareholders is that World Class Extractions has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. We're too cautious to want to invest in a company after an auditor has expressed doubts about its ability to continue as a going concern. That's because companies should always make sure the auditor has confidence that the company will continue as a going concern, in our view. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for World Class Extractions (2 don't sit too well with us!) that you should be aware of before investing here.

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.
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