Is Condor Petroleum (TSE:CPI) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘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. Importantly, Condor Petroleum Inc. (TSE:CPI) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Condor Petroleum

What Is Condor Petroleum’s Debt?

The image below, which you can click on for greater detail, shows that Condor Petroleum had debt of CA$9.00m at the end of March 2019, a reduction from CA$10.3m over a year. However, because it has a cash reserve of CA$1.78m, its net debt is less, at about CA$7.22m.

TSX:CPI Historical Debt, August 5th 2019
TSX:CPI Historical Debt, August 5th 2019

How Strong Is Condor Petroleum’s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Condor Petroleum had liabilities of CA$10.9m due within 12 months and liabilities of CA$8.62m due beyond that. On the other hand, it had cash of CA$1.78m and CA$2.28m worth of receivables due within a year. So its liabilities total CA$15.5m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CA$7.73m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Condor Petroleum would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can’t view debt in total isolation; since Condor Petroleum 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.

Over 12 months, Condor Petroleum reported revenue of CA$15m, which is a gain of 65%. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly savour Condor Petroleum’s tasty revenue growth, its negative earnings before interest and tax (EBIT) leaves a bitter aftertaste. Its EBIT loss was a whopping CA$5.9m. When we look at that alongside the significant liabilities, we’re not particularly confident about the company. We’d want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year’s loss of-CA$14.5m. 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 Condor Petroleum insider transactions.

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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