Is Cielo-Blu Group (TLV:CILO) A Risky Investment?

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. As with many other companies Cielo-Blu Group Ltd (TLV:CILO) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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 Cielo-Blu Group

What Is Cielo-Blu Group's Debt?

The image below, which you can click on for greater detail, shows that Cielo-Blu Group had debt of ₪517.2m at the end of September 2024, a reduction from ₪2.84b over a year. On the flip side, it has ₪102.0m in cash leading to net debt of about ₪415.2m.

How Healthy Is Cielo-Blu Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cielo-Blu Group had liabilities of ₪442.7m due within 12 months and liabilities of ₪360.8m due beyond that. On the other hand, it had cash of ₪102.0m and ₪146.9m worth of receivables due within a year. So its liabilities total ₪554.6m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the ₪185.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Cielo-Blu 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 you can't view debt in total isolation; since Cielo-Blu Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Cielo-Blu Group made a loss at the EBIT level, and saw its revenue drop to ₪273m, which is a fall of 40%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Cielo-Blu Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₪55m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost ₪154m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's 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. We've identified 4 warning signs with Cielo-Blu Group (at least 3 which make us uncomfortable) , and understanding them should be part of your investment process.

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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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.