Is CloudCoCo Group (LON:CLCO) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 CloudCoCo Group plc (LON:CLCO) does use debt in its business. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for CloudCoCo Group

What Is CloudCoCo Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 CloudCoCo Group had UK£5.18m of debt, an increase on UK£4.47m, over one year. However, it also had UK£1.28m in cash, and so its net debt is UK£3.91m.

A Look At CloudCoCo Group's Liabilities

Zooming in on the latest balance sheet data, we can see that CloudCoCo Group had liabilities of UK£10.1m due within 12 months and liabilities of UK£8.34m due beyond that. Offsetting these obligations, it had cash of UK£1.28m as well as receivables valued at UK£4.16m due within 12 months. So its liabilities total UK£13.0m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the UK£7.24m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, CloudCoCo Group would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is CloudCoCo Group'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, CloudCoCo Group reported revenue of UK£25m, which is a gain of 63%, 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.

Caveat Emptor

Even though CloudCoCo Group managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping UK£1.4m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of UK£2.0m. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with CloudCoCo Group .

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.

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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.