Is Corsa Coal (CVE:CSO) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Corsa Coal

What Is Corsa Coal's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Corsa Coal had US$32.1m of debt, an increase on US$18.6m, over one year. However, it does have US$22.5m in cash offsetting this, leading to net debt of about US$9.59m.

How Strong Is Corsa Coal's Balance Sheet?

We can see from the most recent balance sheet that Corsa Coal had liabilities of US$24.4m falling due within a year, and liabilities of US$100.0m due beyond that. Offsetting this, it had US$22.5m in cash and US$6.65m in receivables that were due within 12 months. So its liabilities total US$95.2m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$36.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Corsa Coal would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Corsa Coal 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, Corsa Coal made a loss at the EBIT level, and saw its revenue drop to US$106m, which is a fall of 52%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Corsa Coal's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$30m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of US$55m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. 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. For example - Corsa Coal has 3 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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