Is CleanBnB (BIT:CBB) Using Too Much Debt?

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. Importantly, CleanBnB S.p.A. (BIT:CBB) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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.

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What Is CleanBnB's Debt?

As you can see below, CleanBnB had €3.61m of debt at June 2022, down from €3.78m a year prior. But on the other hand it also has €8.40m in cash, leading to a €4.78m net cash position.

A Look At CleanBnB's Liabilities

According to the last reported balance sheet, CleanBnB had liabilities of €7.85m due within 12 months, and liabilities of €859.7k due beyond 12 months. Offsetting this, it had €8.40m in cash and €397.3k in receivables that were due within 12 months. 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 €9.78m 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 ultimately the future profitability of the business will decide if CleanBnB can strengthen its balance sheet over time. 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 €6.5m, which is a gain of 170%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is CleanBnB?

While CleanBnB lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €2.4m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We think its revenue growth of 170% is a good sign. We'd see further strong growth as an optimistic indication. 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. Case in point: We've spotted 2 warning signs for CleanBnB you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.