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.' 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 CWC Energy Services Corp. (CVE:CWC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does CWC Energy Services Carry?
The chart below, which you can click on for greater detail, shows that CWC Energy Services had CA$36.0m in debt in June 2019; about the same as the year before. And it doesn't have much cash, so its net debt is about the same.
How Strong Is CWC Energy Services's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that CWC Energy Services had liabilities of CA$9.20m due within 12 months and liabilities of CA$47.9m due beyond that. Offsetting these obligations, it had cash of CA$173.0k as well as receivables valued at CA$15.7m due within 12 months. So its liabilities total CA$41.2m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because CWC Energy Services is worth CA$74.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine CWC Energy Services's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, CWC Energy Services saw its revenue drop to CA$124m, which is a fall of 9.0%. That's not what we would hope to see.
Importantly, CWC Energy Services had negative earnings before interest and tax (EBIT), over the last year. To be specific the EBIT loss came in at CA$77k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of-CA$443.0k. So in short it's a really risky stock. For riskier companies like CWC Energy Services 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.
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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