Is CEMATRIX (CVE:CVX) Using Debt In A Risky Way?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, CEMATRIX Corporation (CVE:CVX) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for CEMATRIX

How Much Debt Does CEMATRIX Carry?

You can click the graphic below for the historical numbers, but it shows that CEMATRIX had CA$2.85m of debt in June 2023, down from CA$6.95m, one year before. But it also has CA$3.52m in cash to offset that, meaning it has CA$672.0k net cash.

How Healthy Is CEMATRIX's Balance Sheet?

According to the last reported balance sheet, CEMATRIX had liabilities of CA$3.30m due within 12 months, and liabilities of CA$2.70m due beyond 12 months. Offsetting this, it had CA$3.52m in cash and CA$4.95m in receivables that were due within 12 months. So it can boast CA$2.46m more liquid assets than total liabilities.

This surplus suggests that CEMATRIX has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that CEMATRIX has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since CEMATRIX will need earnings to service that debt. 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, CEMATRIX reported revenue of CA$33m, which is a gain of 43%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is CEMATRIX?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months CEMATRIX lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$4.3m of cash and made a loss of CA$4.4m. While this does make the company a bit risky, it's important to remember it has net cash of CA$672.0k. That kitty means the company can keep spending for growth for at least two years, at current rates. CEMATRIX's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. We've identified 3 warning signs with CEMATRIX (at least 2 which make us uncomfortable) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.