Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Condor Petroleum Inc. (TSE:CPI) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Condor Petroleum Carry?
The image below, which you can click on for greater detail, shows that Condor Petroleum had debt of CA$9.00m at the end of March 2019, a reduction from CA$10.3m over a year. On the flip side, it has CA$1.78m in cash leading to net debt of about CA$7.22m.
How Strong Is Condor Petroleum's Balance Sheet?
We can see from the most recent balance sheet that Condor Petroleum had liabilities of CA$10.9m falling due within a year, and liabilities of CA$8.62m due beyond that. Offsetting these obligations, it had cash of CA$1.78m as well as receivables valued at CA$2.28m due within 12 months. So it has liabilities totalling CA$15.5m more than its cash and near-term receivables, combined.
This deficit casts a shadow over the CA$7.95m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt After all, Condor Petroleum would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Condor Petroleum'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.
Over 12 months, Condor Petroleum reported revenue of CA$15m, which is a gain of 65%. With any luck the company will be able to grow its way to profitability.
Even though Condor Petroleum managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping CA$5.9m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of-CA$14.5m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. For riskier companies like Condor Petroleum I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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 firstname.lastname@example.org. 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.