Is Africa Energy (CVE:AFE) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Africa Energy Corp. (CVE:AFE) does have debt on its balance sheet. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Africa Energy

How Much Debt Does Africa Energy Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Africa Energy had US$5.00m of debt, an increase on none, over one year. However, it does have US$939.0k in cash offsetting this, leading to net debt of about US$4.06m.

How Strong Is Africa Energy's Balance Sheet?

According to the balance sheet data, Africa Energy had liabilities of US$5.52m due within 12 months, but no longer term liabilities. On the other hand, it had cash of US$939.0k and US$52.0k worth of receivables due within a year. So it has liabilities totalling US$4.53m more than its cash and near-term receivables, combined.

Of course, Africa Energy has a market capitalization of US$99.0m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, 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 Africa 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.

Given its lack of meaningful operating revenue, Africa Energy shareholders no doubt hope it can fund itself until it can sell some combustibles.

Caveat Emptor

Over the last twelve months Africa Energy produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$20m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$11m of cash over the last year. So suffice it to say we consider the stock very risky. 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. Be aware that Africa Energy is showing 4 warning signs in our investment analysis , and 2 of those don't sit too well with us...

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.