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 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 more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Clear Blue Technologies International Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2021 Clear Blue Technologies International had CA$3.12m of debt, an increase on CA$2.02m, over one year. However, because it has a cash reserve of CA$597.4k, its net debt is less, at about CA$2.53m.
How Strong Is Clear Blue Technologies International's Balance Sheet?
We can see from the most recent balance sheet that Clear Blue Technologies International had liabilities of CA$1.89m falling due within a year, and liabilities of CA$3.95m due beyond that. Offsetting this, it had CA$597.4k in cash and CA$3.17m in receivables that were due within 12 months. So its liabilities total CA$2.08m more than the combination of its cash and short-term receivables.
Since publicly traded Clear Blue Technologies International shares are worth a total of CA$25.6m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Clear Blue Technologies International'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, Clear Blue Technologies International reported revenue of CA$7.2m, which is a gain of 87%, 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.
Despite the top line growth, Clear Blue Technologies International still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$2.4m. 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$5.8m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. Case in point: We've spotted 5 warning signs for Clear Blue Technologies International you should be aware of, and 2 of them shouldn't be ignored.
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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