Would Vintage Energy (ASX:VEN) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Vintage Energy Limited (ASX:VEN) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Vintage Energy

How Much Debt Does Vintage Energy Carry?

The image below, which you can click on for greater detail, shows that at June 2023 Vintage Energy had debt of AU$7.70m, up from AU$6.92m in one year. However, it also had AU$7.51m in cash, and so its net debt is AU$194.7k.

How Healthy Is Vintage Energy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Vintage Energy had liabilities of AU$3.26m due within 12 months and liabilities of AU$18.0m due beyond that. Offsetting these obligations, it had cash of AU$7.51m as well as receivables valued at AU$1.08m due within 12 months. So its liabilities total AU$12.7m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Vintage Energy is worth AU$33.0m, 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. But either way, Vintage Energy has virtually no net debt, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Vintage Energy will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

While it hasn't made a profit, at least Vintage Energy booked its first revenue as a publicly listed company, in the last twelve months.

Caveat Emptor

Importantly, Vintage Energy had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable AU$12m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled AU$16m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with Vintage Energy (at least 3 which don't sit too well with us) , and understanding them should be part of your investment process.

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.

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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.