Is Corsa Coal (CVE:CSO) Weighed On By Its Debt Load?

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 Corsa Coal Corp. (CVE:CSO) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Corsa Coal

What Is Corsa Coal's Debt?

As you can see below, at the end of June 2021, Corsa Coal had US$31.6m of debt, up from US$18.0m a year ago. Click the image for more detail. However, because it has a cash reserve of US$16.5m, its net debt is less, at about US$15.1m.

How Healthy Is Corsa Coal's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Corsa Coal had liabilities of US$23.9m due within 12 months and liabilities of US$98.5m due beyond that. On the other hand, it had cash of US$16.5m and US$13.8m worth of receivables due within a year. So it has liabilities totalling US$92.1m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of US$63.8m, we think shareholders really should watch Corsa Coal's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 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$95m, which is a fall of 52%. 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$31m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous 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$15m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Corsa Coal is showing 4 warning signs in our investment analysis , and 1 of those shouldn'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.

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.

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