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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Clear Blue Technologies International Inc. (CVE:CBLU) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Clear Blue Technologies International's Debt?
The chart below, which you can click on for greater detail, shows that Clear Blue Technologies International had CA$3.94m in debt in June 2021; about the same as the year before. However, it also had CA$657.0k in cash, and so its net debt is CA$3.29m.
A Look At Clear Blue Technologies International's Liabilities
According to the last reported balance sheet, Clear Blue Technologies International had liabilities of CA$2.95m due within 12 months, and liabilities of CA$3.87m due beyond 12 months. On the other hand, it had cash of CA$657.0k and CA$1.75m worth of receivables due within a year. So it has liabilities totalling CA$4.41m more than its cash and near-term receivables, combined.
Clear Blue Technologies International has a market capitalization of CA$19.7m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Clear Blue Technologies International 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, Clear Blue Technologies International reported revenue of CA$7.7m, which is a gain of 112%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!
Despite the top line growth, Clear Blue Technologies International still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$3.0m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$5.7m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Clear Blue Technologies International has 5 warning signs (and 2 which don't sit too well with us) we think you should know about.
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.
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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