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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that World Class Extractions Inc. (CSE:PUMP) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for World Class Extractions

How Much Debt Does World Class Extractions Carry?

As you can see below, at the end of October 2020, World Class Extractions had CA$2.50m of debt, up from none a year ago. Click the image for more detail. On the flip side, it has CA$1.36m in cash leading to net debt of about CA$1.14m.

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$5.60m due within 12 months and liabilities of CA$972.7k due beyond that. Offsetting this, it had CA$1.36m in cash and CA$2.09m in receivables that were due within 12 months. So it has liabilities totalling CA$3.13m more than its cash and near-term receivables, combined.

This deficit isn't so bad because World Class Extractions is worth CA$12.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, World Class Extractions reported revenue of CA$5.3m, which is a gain of 2,826%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Even though World Class Extractions managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable CA$13m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$6.0m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - World Class Extractions has 4 warning signs (and 2 which are a bit concerning) we think you should know about.

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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