Is Chrometco (JSE:CMO) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Chrometco Limited (JSE:CMO) 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?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Chrometco

What Is Chrometco's Debt?

The image below, which you can click on for greater detail, shows that at August 2020 Chrometco had debt of R609.0m, up from R462.3m in one year. On the flip side, it has R14.8m in cash leading to net debt of about R594.2m.

A Look At Chrometco's Liabilities

The latest balance sheet data shows that Chrometco had liabilities of R1.24b due within a year, and liabilities of R262.3m falling due after that. Offsetting these obligations, it had cash of R14.8m as well as receivables valued at R144.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R1.34b.

This deficit casts a shadow over the R127.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Chrometco would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Chrometco's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Chrometco made a loss at the EBIT level, and saw its revenue drop to R1.1b, which is a fall of 16%. That's not what we would hope to see.

Caveat Emptor

Not only did Chrometco's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable R118m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost R103m in the last year. So we think buying this stock is 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. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Chrometco (of which 2 are concerning!) you should know about.

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. 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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