Corsa Coal (CVE:CSO) Has Debt But No Earnings; Should You Worry?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Corsa Coal Corp. (CVE:CSO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Corsa Coal

How Much Debt Does Corsa Coal Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Corsa Coal had US$29.9m of debt, an increase on US$10.1m, over one year. However, it does have US$17.4m in cash offsetting this, leading to net debt of about US$12.6m.

How Healthy Is Corsa Coal's Balance Sheet?

We can see from the most recent balance sheet that Corsa Coal had liabilities of US$23.7m falling due within a year, and liabilities of US$96.4m due beyond that. On the other hand, it had cash of US$17.4m and US$16.5m worth of receivables due within a year. So it has liabilities totalling US$86.2m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$52.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Corsa Coal would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Corsa Coal'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, Corsa Coal made a loss at the EBIT level, and saw its revenue drop to US$108m, which is a fall of 35%. That makes us nervous, to say the least.

Caveat Emptor

While Corsa Coal's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable US$21m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$1.7m in negative free cash flow over the last year. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Corsa Coal (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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.