CVD Equipment (NASDAQ:CVV) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies CVD Equipment Corporation (NASDAQ:CVV) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for CVD Equipment

What Is CVD Equipment's Debt?

You can click the graphic below for the historical numbers, but it shows that CVD Equipment had US$1.84m of debt in September 2021, down from US$14.0m, one year before. However, it does have US$17.4m in cash offsetting this, leading to net cash of US$15.6m.

A Look At CVD Equipment's Liabilities

According to the balance sheet data, CVD Equipment had liabilities of US$5.68m due within 12 months, but no longer term liabilities. On the other hand, it had cash of US$17.4m and US$4.24m worth of receivables due within a year. So it can boast US$16.0m more liquid assets than total liabilities.

This surplus liquidity suggests that CVD Equipment's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, CVD Equipment boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since CVD Equipment 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, CVD Equipment made a loss at the EBIT level, and saw its revenue drop to US$15m, which is a fall of 23%. To be frank that doesn't bode well.

So How Risky Is CVD Equipment?

While CVD Equipment lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of US$631k. So taking that on face value, and considering the cash, we don't think its very risky in the near term. There's no doubt the next few years will be crucial to how the business matures. 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. For instance, we've identified 2 warning signs for CVD Equipment that you should be aware of.

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.