Is Empire Energy Group (ASX:EEG) A Risky Investment?

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. Importantly, Empire Energy Group Limited (ASX:EEG) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Empire Energy Group

What Is Empire Energy Group's Net Debt?

The chart below, which you can click on for greater detail, shows that Empire Energy Group had AU$7.82m in debt in December 2022; about the same as the year before. However, it does have AU$21.9m in cash offsetting this, leading to net cash of AU$14.1m.

A Look At Empire Energy Group's Liabilities

The latest balance sheet data shows that Empire Energy Group had liabilities of AU$26.9m due within a year, and liabilities of AU$37.1m falling due after that. Offsetting these obligations, it had cash of AU$21.9m as well as receivables valued at AU$9.68m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$32.5m.

This deficit isn't so bad because Empire Energy Group is worth AU$150.8m, 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. While it does have liabilities worth noting, Empire Energy Group also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Empire Energy Group'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 Empire Energy Group wasn't profitable at an EBIT level, but managed to grow its revenue by 61%, to AU$14m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Empire Energy Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Empire Energy Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through AU$32m of cash and made a loss of AU$6.0m. While this does make the company a bit risky, it's important to remember it has net cash of AU$14.1m. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Empire Energy Group may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Empire Energy Group is showing 5 warning signs in our investment analysis , and 1 of those can't be ignored...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.