Is CVD Equipment (NASDAQ:CVV) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that CVD Equipment Corporation (NASDAQ:CVV) does have debt on its balance sheet. 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. If things get really bad, the lenders can take control of the business. 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.

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$1.92m of debt in June 2021, down from US$14.1m, one year before. But on the other hand it also has US$5.39m in cash, leading to a US$3.47m net cash position.

How Strong Is CVD Equipment's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CVD Equipment had liabilities of US$14.7m due within 12 months and no liabilities due beyond that. Offsetting these obligations, it had cash of US$5.39m as well as receivables valued at US$2.93m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$6.40m.

Of course, CVD Equipment has a market capitalization of US$34.8m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, CVD Equipment boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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 31%. That makes us nervous, to say the least.

So How Risky Is CVD Equipment?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that CVD Equipment had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$3.3m of cash and made a loss of US$6.6m. But at least it has US$3.47m on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For instance, we've identified 4 warning signs for CVD Equipment (2 shouldn't be ignored) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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