Yahoo Finance Is Canadian Premium Sand (CVE:CPS) Using Too Much Debt?
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 note that Canadian Premium Sand Inc. (CVE:CPS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Canadian Premium Sand
What Is Canadian Premium Sand's Net Debt?
The image below, which you can click on for greater detail, shows that at December 2021 Canadian Premium Sand had debt of CA$2.34m, up from CA$2.09m in one year. However, it does have CA$3.80m in cash offsetting this, leading to net cash of CA$1.46m.
A Look At Canadian Premium Sand's Liabilities
According to the last reported balance sheet, Canadian Premium Sand had liabilities of CA$1.28m due within 12 months, and liabilities of CA$2.42m due beyond 12 months. Offsetting this, it had CA$3.80m in cash and CA$13.9k in receivables that were due within 12 months. So it actually has CA$112.6k more liquid assets than total liabilities.
Having regard to Canadian Premium Sand's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CA$28.7m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Canadian Premium Sand has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Canadian Premium Sand will need earnings to service that debt. 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.
Given its lack of meaningful operating revenue, Canadian Premium Sand shareholders no doubt hope it can fund itself until it can sell some combustibles.
So How Risky Is Canadian Premium Sand?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Canadian Premium Sand had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CA$3.4m and booked a CA$2.9m accounting loss. With only CA$1.46m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. 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. Case in point: We've spotted 6 warning signs for Canadian Premium Sand you should be aware of, and 4 of them are a bit concerning.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
