David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the 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, Crescent Point Energy Corp. (TSE:CPG) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Crescent Point Energy’s Debt?
The image below, which you can click on for greater detail, shows that Crescent Point Energy had debt of CA$3.58b at the end of September 2019, a reduction from CA$4.16b over a year. On the flip side, it has CA$122.9m in cash leading to net debt of about CA$3.46b.
A Look At Crescent Point Energy’s Liabilities
Zooming in on the latest balance sheet data, we can see that Crescent Point Energy had liabilities of CA$992.6m due within 12 months and liabilities of CA$4.69b due beyond that. Offsetting this, it had CA$122.9m in cash and CA$336.7m in receivables that were due within 12 months. So it has liabilities totalling CA$5.23b more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the CA$2.87b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet.” So we definitely think shareholders need to watch this one closely. After all, Crescent Point Energy would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Crescent Point Energy’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, Crescent Point Energy made a loss at the EBIT level, and saw its revenue drop to CA$2.9b, which is a fall of 15%. That’s not what we would hope to see.
Not only did Crescent Point Energy’s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CA$2.9b at the EBIT level. 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$2.5b didn’t encourage us either; we’d like to see a profit. In the meantime, we consider the stock to be 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 Crescent Point Energy insider transactions.
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 email@example.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.