Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 CGX Energy Inc. (CVE:OYL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is CGX Energy's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 CGX Energy had US$31.6m of debt, an increase on US$18.7m, over one year. However, because it has a cash reserve of US$15.1m, its net debt is less, at about US$16.5m.
How Strong Is CGX Energy's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that CGX Energy had liabilities of US$49.1m due within 12 months and liabilities of US$1.91m due beyond that. On the other hand, it had cash of US$15.1m and US$79.8k worth of receivables due within a year. So its liabilities total US$35.9m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because CGX Energy is worth US$60.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since CGX Energy 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.
Since CGX Energy doesn't have significant operating revenue, shareholders must hope it'll sell some fossil fuels, before it runs out of money.
Importantly, CGX Energy had negative earnings before interest and tax (EBIT), over the last year. To be specific the EBIT loss came in at US$3.1m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$19m of cash over the last year. So suffice it to say we consider the stock very risky. 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 CGX Energy 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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