Is Cooper Energy (ASX:COE) Using Debt In A Risky Way?

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.' 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 Cooper Energy Limited (ASX:COE) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Cooper Energy

What Is Cooper Energy's Debt?

As you can see below, Cooper Energy had AU$144.3m of debt at December 2022, down from AU$204.0m a year prior. However, because it has a cash reserve of AU$88.3m, its net debt is less, at about AU$55.9m.

How Healthy Is Cooper Energy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cooper Energy had liabilities of AU$234.9m due within 12 months and liabilities of AU$570.3m due beyond that. On the other hand, it had cash of AU$88.3m and AU$21.9m worth of receivables due within a year. So it has liabilities totalling AU$695.0m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the AU$407.9m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Cooper Energy would likely require a major re-capitalisation if it had to pay its creditors today. 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 Cooper Energy's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Cooper Energy wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to AU$211m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Cooper Energy produced an earnings before interest and tax (EBIT) loss. Indeed, it lost AU$12m 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. Not least because it burned through AU$180m in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Cooper Energy .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.