Is World Class Extractions (CSE:PUMP) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, World Class Extractions Inc. (CSE:PUMP) does carry debt. But is this debt a concern to shareholders?

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 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, 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.

Check out our latest analysis for World Class Extractions

What Is World Class Extractions's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of January 2021 World Class Extractions had CA$2.61m of debt, an increase on none, over one year. However, it does have CA$3.02m in cash offsetting this, leading to net cash of CA$408.9k.

A Look At World Class Extractions' Liabilities

Zooming in on the latest balance sheet data, we can see that World Class Extractions had liabilities of CA$5.59m due within 12 months and liabilities of CA$911.3k due beyond that. Offsetting this, it had CA$3.02m in cash and CA$2.27m in receivables that were due within 12 months. So its liabilities total CA$1.21m more than the combination of its cash and short-term receivables.

Since publicly traded World Class Extractions shares are worth a total of CA$15.6m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, World Class Extractions 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 World Class Extractions'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.

Over 12 months, World Class Extractions reported revenue of CA$7.9m, which is a gain of 2,867%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is World Class Extractions?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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. With only CA$408.9k on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, World Class Extractions's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that World Class Extractions is showing 3 warning signs in our investment analysis , and 1 of those can't be ignored...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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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