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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Corsa Coal Corp. (CVE:CSO) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Corsa Coal

What Is Corsa Coal's Debt?

The image below, which you can click on for greater detail, shows that Corsa Coal had debt of US$24.8m at the end of September 2023, a reduction from US$27.0m over a year. However, it also had US$7.86m in cash, and so its net debt is US$16.9m.

How Strong Is Corsa Coal's Balance Sheet?

According to the last reported balance sheet, Corsa Coal had liabilities of US$45.1m due within 12 months, and liabilities of US$91.7m due beyond 12 months. Offsetting these obligations, it had cash of US$7.86m as well as receivables valued at US$11.5m due within 12 months. So its liabilities total US$117.5m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$30.5m 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year Corsa Coal wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to US$193m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Corsa Coal produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$3.2m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. However, we note that trailing twelve month EBIT is worse than the free cash flow of US$3.5m and the profit of US$13m. So one might argue that there's still a chance it can get things on the right track. 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. We've identified 2 warning signs with Corsa Coal , and understanding them should be part of your investment process.

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. 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.