Alvopetro Energy (CVE:ALV) Has A Rock Solid Balance Sheet

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 Alvopetro Energy Ltd. (CVE:ALV) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Alvopetro Energy

What Is Alvopetro Energy's Debt?

You can click the graphic below for the historical numbers, but it shows that Alvopetro Energy had US$5.05m of debt in March 2022, down from US$13.0m, one year before. But it also has US$12.7m in cash to offset that, meaning it has US$7.70m net cash.

A Look At Alvopetro Energy's Liabilities

Zooming in on the latest balance sheet data, we can see that Alvopetro Energy had liabilities of US$9.63m due within 12 months and liabilities of US$13.0m due beyond that. Offsetting this, it had US$12.7m in cash and US$7.42m in receivables that were due within 12 months. So it has liabilities totalling US$2.48m more than its cash and near-term receivables, combined.

This state of affairs indicates that Alvopetro Energy's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$175.8m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Alvopetro Energy also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Alvopetro Energy grew its EBIT by 193% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Alvopetro Energy's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Alvopetro 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. During the last two years, Alvopetro Energy generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Alvopetro Energy has US$7.70m in net cash. And it impressed us with free cash flow of US$21m, being 89% of its EBIT. So is Alvopetro Energy's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 4 warning signs for Alvopetro Energy you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.