Is CEMATRIX (CVE:CVX) Using Too Much Debt?

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.' 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. We can see that CEMATRIX Corporation (CVE:CVX) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for CEMATRIX

What Is CEMATRIX's Net Debt?

As you can see below, CEMATRIX had CA$6.82m of debt at March 2022, down from CA$15.4m a year prior. However, its balance sheet shows it holds CA$18.3m in cash, so it actually has CA$11.5m net cash.

A Look At CEMATRIX's Liabilities

We can see from the most recent balance sheet that CEMATRIX had liabilities of CA$4.72m falling due within a year, and liabilities of CA$8.07m due beyond that. On the other hand, it had cash of CA$18.3m and CA$4.31m worth of receivables due within a year. So it actually has CA$9.81m more liquid assets than total liabilities.

This excess liquidity is a great indication that CEMATRIX's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. 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 ultimately the future profitability of the business will decide if CEMATRIX can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year CEMATRIX had a loss before interest and tax, and actually shrunk its revenue by 14%, to CA$23m. That's not what we would hope to see.

So How Risky Is CEMATRIX?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months CEMATRIX lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$3.0m and booked a CA$4.3m accounting loss. But the saving grace is the CA$11.5m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for CEMATRIX (1 shouldn't be ignored!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.