Is Clean Air Metals (CVE:AIR) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Clean Air Metals Inc. (CVE:AIR) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Clean Air Metals

What Is Clean Air Metals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Clean Air Metals had CA$2.65m of debt in April 2022, down from CA$3.73m, one year before. But on the other hand it also has CA$7.27m in cash, leading to a CA$4.62m net cash position.

How Strong Is Clean Air Metals' Balance Sheet?

The latest balance sheet data shows that Clean Air Metals had liabilities of CA$2.54m due within a year, and liabilities of CA$1.07m falling due after that. Offsetting this, it had CA$7.27m in cash and CA$823.6k in receivables that were due within 12 months. So it actually has CA$4.48m more liquid assets than total liabilities.

This short term liquidity is a sign that Clean Air Metals could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Clean Air Metals boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Clean Air Metals's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Given its lack of meaningful operating revenue, investors are probably hoping that Clean Air Metals finds some valuable resources, before it runs out of money.

So How Risky Is Clean Air Metals?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Clean Air Metals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$17m of cash and made a loss of CA$2.7m. But at least it has CA$4.62m on the balance sheet to spend on growth, near-term. 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. Case in point: We've spotted 5 warning signs for Clean Air Metals you should be aware of, and 3 of them can't be ignored.

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.