We Think CloudCoCo Group (LON:CLCO) Has A Fair Chunk Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, CloudCoCo Group plc (LON:CLCO) does carry debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Check out 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 CloudCoCo Group had UK£3.56m of debt in September 2020, down from UK£4.27m, one year before. However, because it has a cash reserve of UK£588.0k, its net debt is less, at about UK£2.97m.

A Look At CloudCoCo Group's Liabilities

According to the last reported balance sheet, CloudCoCo Group had liabilities of UK£3.26m due within 12 months, and liabilities of UK£4.82m due beyond 12 months. Offsetting this, it had UK£588.0k in cash and UK£1.86m in receivables that were due within 12 months. So it has liabilities totalling UK£5.64m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of UK£8.17m, so it does suggest shareholders should keep an eye on CloudCoCo Group's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is CloudCoCo Group'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.

In the last year CloudCoCo Group wasn't profitable at an EBIT level, but managed to grow its revenue by 9.8%, to UK£8.0m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, CloudCoCo Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable UK£2.5m at the EBIT level. 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. We would feel better if it turned its trailing twelve month loss of UK£2.7m into a profit. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with CloudCoCo Group (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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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