Is CleanBnB (BIT:CBB) Using Debt Sensibly?

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 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. We can see that CleanBnB S.p.A. (BIT:CBB) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for CleanBnB

What Is CleanBnB's Net Debt?

As you can see below, at the end of June 2020, CleanBnB had €1.82m of debt, up from none a year ago. Click the image for more detail. However, it does have €3.16m in cash offsetting this, leading to net cash of €1.34m.

How Healthy Is CleanBnB's Balance Sheet?

The latest balance sheet data shows that CleanBnB had liabilities of €3.65m due within a year, and liabilities of €234.5k falling due after that. On the other hand, it had cash of €3.16m and €748.1k worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to CleanBnB's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €8.18m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, CleanBnB boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine CleanBnB's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, CleanBnB reported revenue of €2.8m, which is a gain of 17%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is CleanBnB?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year CleanBnB had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of €3.1m and booked a €2.5m accounting loss. But at least it has €1.34m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. To that end, you should learn about the 4 warning signs we've spotted with CleanBnB (including 1 which is is significant) .

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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