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.' 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. We can see that CO2 Gro Inc. (CVE:GROW) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is CO2 Gro's Debt?
The image below, which you can click on for greater detail, shows that CO2 Gro had debt of CA$270.3k at the end of March 2019, a reduction from CA$304.9k over a year. However, its balance sheet shows it holds CA$1.62m in cash, so it actually has CA$1.35m net cash.
A Look At CO2 Gro's Liabilities
According to the balance sheet data, CO2 Gro had liabilities of CA$878.6k due within 12 months, but no longer term liabilities. Offsetting these obligations, it had cash of CA$1.62m as well as receivables valued at CA$27.9k due within 12 months. So it actually has CA$765.7k more liquid assets than total liabilities.
This short term liquidity is a sign that CO2 Gro could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, CO2 Gro boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since CO2 Gro 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 CO2 Gro can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.
So How Risky Is CO2 Gro?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that CO2 Gro had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of CA$1.1m and booked a CA$1.3m accounting loss. However, it has net cash of CA$1.6m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting CO2 Gro insider transactions.
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.
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