Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies CardieX Limited (ASX:CDX) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 think about a company's use of debt, we first look at cash and debt together.
What Is CardieX's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2019 CardieX had debt of AU$3.35m, up from AU$185.0k in one year. But on the other hand it also has AU$4.98m in cash, leading to a AU$1.63m net cash position.
A Look At CardieX's Liabilities
The latest balance sheet data shows that CardieX had liabilities of AU$5.06m due within a year, and liabilities of AU$1.20m falling due after that. On the other hand, it had cash of AU$4.98m and AU$1.01m worth of receivables due within a year. So it has liabilities totalling AU$265.2k more than its cash and near-term receivables, combined.
Having regard to CardieX's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the AU$18.8m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, CardieX 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 it is CardieX'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.
In the last year CardieX managed to grow its revenue by 7.1%, to AU$4.7m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is CardieX?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that CardieX had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through AU$2.6m of cash and made a loss of AU$3.0m. But at least it has AU$5.0m 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. For riskier companies like CardieX I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.