Here's Why Crew Energy (TSE:CR) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Crew Energy Inc. (TSE:CR) does use debt in its business. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Crew Energy

What Is Crew Energy's Debt?

You can click the graphic below for the historical numbers, but it shows that Crew Energy had CA$28.9m of debt in June 2023, down from CA$306.4m, one year before. However, its balance sheet shows it holds CA$81.5m in cash, so it actually has CA$52.6m net cash.

How Healthy Is Crew Energy's Balance Sheet?

The latest balance sheet data shows that Crew Energy had liabilities of CA$44.0m due within a year, and liabilities of CA$243.9m falling due after that. Offsetting these obligations, it had cash of CA$81.5m as well as receivables valued at CA$26.7m due within 12 months. So it has liabilities totalling CA$179.7m more than its cash and near-term receivables, combined.

Of course, Crew Energy has a market capitalization of CA$913.0m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Crew Energy boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Crew Energy grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Crew Energy can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Crew Energy has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last two years, Crew Energy's free cash flow amounted to 40% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Crew Energy does have more liabilities than liquid assets, it also has net cash of CA$52.6m. And we liked the look of last year's 21% year-on-year EBIT growth. So we are not troubled with Crew Energy's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Crew Energy that you should be aware of.

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.