Caledonian Trust (LON:CNN) Is Carrying A Fair Bit Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Caledonian Trust PLC (LON:CNN) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Caledonian Trust

How Much Debt Does Caledonian Trust Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Caledonian Trust had UK£5.62m of debt, an increase on UK£4.95m, over one year. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Caledonian Trust's Balance Sheet?

According to the last reported balance sheet, Caledonian Trust had liabilities of UK£2.72m due within 12 months, and liabilities of UK£4.12m due beyond 12 months. Offsetting this, it had UK£72.0k in cash and UK£89.0k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£6.68m.

Caledonian Trust has a market capitalization of UK£17.1m, 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 it is Caledonian Trust's earnings that will influence how the balance sheet holds up in the future. 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.

Given it has no significant operating revenue at the moment, shareholders will be hoping Caledonian Trust can make progress and gain better traction for the business, before it runs low on cash.

Caveat Emptor

Not only did Caledonian Trust's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at UK£126k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through UK£722k of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Caledonian Trust has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.

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