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

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

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for CEMATRIX

How Much Debt Does CEMATRIX Carry?

The image below, which you can click on for greater detail, shows that CEMATRIX had debt of CA$6.89m at the end of September 2022, a reduction from CA$7.20m over a year. However, its balance sheet shows it holds CA$12.2m in cash, so it actually has CA$5.36m net cash.

A Look At CEMATRIX's Liabilities

According to the last reported balance sheet, CEMATRIX had liabilities of CA$11.1m due within 12 months, and liabilities of CA$4.27m due beyond 12 months. Offsetting this, it had CA$12.2m in cash and CA$9.57m in receivables that were due within 12 months. So it actually has CA$6.45m more liquid assets than total liabilities.

It's good to see that CEMATRIX has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. 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 it is future earnings, more than anything, that will determine CEMATRIX's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, CEMATRIX reported revenue of CA$28m, which is a gain of 38%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is CEMATRIX?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that CEMATRIX had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CA$4.0m of cash and made a loss of CA$5.9m. While this does make the company a bit risky, it's important to remember it has net cash of CA$5.36m. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, CEMATRIX may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. We've identified 2 warning signs with CEMATRIX (at least 1 which is concerning) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.