Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Carnegie Clean Energy Limited (ASX:CCE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Carnegie Clean Energy's Debt?
As you can see below, Carnegie Clean Energy had AU$2.83m of debt at June 2020, down from AU$6.04m a year prior. However, it does have AU$3.41m in cash offsetting this, leading to net cash of AU$589.7k.
How Healthy Is Carnegie Clean Energy's Balance Sheet?
We can see from the most recent balance sheet that Carnegie Clean Energy had liabilities of AU$3.24m falling due within a year, and liabilities of AU$100.4k due beyond that. Offsetting these obligations, it had cash of AU$3.41m as well as receivables valued at AU$169.8k due within 12 months. So it actually has AU$239.5k more liquid assets than total liabilities.
This surplus suggests that Carnegie Clean Energy has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Carnegie Clean Energy 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 Carnegie Clean Energy 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.
It seems likely shareholders hope that Carnegie Clean Energy can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.
So How Risky Is Carnegie Clean Energy?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Carnegie Clean Energy had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of AU$2.1m and booked a AU$1.8m accounting loss. With only AU$589.7k on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. To that end, you should learn about the 6 warning signs we've spotted with Carnegie Clean Energy (including 5 which is make us uncomfortable) .
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. 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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