Health Check: How Prudently Does Kolibri Global Energy (TSE:KEI) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Kolibri Global Energy Inc. (TSE:KEI) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Kolibri Global Energy

What Is Kolibri Global Energy's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Kolibri Global Energy had US$19.8m of debt in March 2021, down from US$26.2m, one year before. However, it also had US$1.21m in cash, and so its net debt is US$18.6m.

How Healthy Is Kolibri Global Energy's Balance Sheet?

We can see from the most recent balance sheet that Kolibri Global Energy had liabilities of US$7.36m falling due within a year, and liabilities of US$18.8m due beyond that. Offsetting these obligations, it had cash of US$1.21m as well as receivables valued at US$1.78m due within 12 months. So its liabilities total US$23.1m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$15.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Kolibri Global Energy would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kolibri Global Energy's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Kolibri Global Energy made a loss at the EBIT level, and saw its revenue drop to US$9.8m, which is a fall of 39%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Kolibri Global Energy's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$3.3m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of US$4.4m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Kolibri Global Energy (including 1 which is a bit unpleasant) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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