Is Clean Energy Technologies (NASDAQ:CETY) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Clean Energy Technologies, Inc. (NASDAQ:CETY) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Clean Energy Technologies

What Is Clean Energy Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that Clean Energy Technologies had US$4.27m of debt in December 2022, down from US$6.57m, one year before. However, it does have US$985.0k in cash offsetting this, leading to net debt of about US$3.28m.

How Strong Is Clean Energy Technologies' Balance Sheet?

According to the last reported balance sheet, Clean Energy Technologies had liabilities of US$6.24m due within 12 months, and liabilities of US$1.0 due beyond 12 months. On the other hand, it had cash of US$985.0k and US$1.48m worth of receivables due within a year. So its liabilities total US$3.77m more than the combination of its cash and short-term receivables.

Since publicly traded Clean Energy Technologies shares are worth a total of US$99.3m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Clean Energy Technologies 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, Clean Energy Technologies reported revenue of US$2.7m, which is a gain of 105%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Despite the top line growth, Clean Energy Technologies still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$990k. 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. Another cause for caution is that is bled US$2.2m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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. To that end, you should learn about the 7 warning signs we've spotted with Clean Energy Technologies (including 4 which don't sit too well with us) .

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.