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. Importantly, CVD Equipment Corporation (NASDAQ:CVV) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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 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 CVD Equipment's Net Debt?
The chart below, which you can click on for greater detail, shows that CVD Equipment had US$12.6m in debt in June 2019; about the same as the year before. However, it does have US$8.58m in cash offsetting this, leading to net debt of about US$4.00m.
A Look At CVD Equipment's Liabilities
Zooming in on the latest balance sheet data, we can see that CVD Equipment had liabilities of US$4.40m due within 12 months and liabilities of US$11.7m due beyond that. Offsetting these obligations, it had cash of US$8.58m as well as receivables valued at US$3.72m due within 12 months. So its liabilities total US$3.81m more than the combination of its cash and short-term receivables.
Since publicly traded CVD Equipment shares are worth a total of US$22.3m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is CVD Equipment's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year CVD Equipment actually shrunk its revenue by 53%, to US$17m. That makes us nervous, to say the least.
Not only did CVD Equipment'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 US$8.9m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$6.3m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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 CVD Equipment insider transactions.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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