Yahoo Finance Clean TeQ Holdings (ASX:CLQ) Has Debt But No Earnings; Should You Worry?
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.' 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. We can see that Clean TeQ Holdings Limited (ASX:CLQ) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.
See our latest analysis for Clean TeQ Holdings
What Is Clean TeQ Holdings's Net Debt?
As you can see below, at the end of June 2019, Clean TeQ Holdings had AU$137.0k of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has AU$79.0m in cash, leading to a AU$78.8m net cash position.
A Look At Clean TeQ Holdings's Liabilities
We can see from the most recent balance sheet that Clean TeQ Holdings had liabilities of AU$12.1m falling due within a year, and liabilities of AU$885.0k due beyond that. On the other hand, it had cash of AU$79.0m and AU$18.4m worth of receivables due within a year. So it can boast AU$84.4m more liquid assets than total liabilities.
This surplus suggests that Clean TeQ Holdings is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Clean TeQ Holdings 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 ultimately the future profitability of the business will decide if Clean TeQ Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Clean TeQ Holdings reported revenue of AU$7.7m, which is a gain of 30%. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Clean TeQ Holdings?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Clean TeQ Holdings had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of AU$74m and booked a AU$18m accounting loss. However, it has net cash of AU$79m, so it has a bit of time before it will need more capital. Clean TeQ Holdings's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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 Clean TeQ Holdings insider transactions.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.
