Alvopetro Energy (CVE:ALV) Is Carrying A Fair Bit Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Alvopetro Energy Ltd. (CVE:ALV) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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

How Much Debt Does Alvopetro Energy Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Alvopetro Energy had debt of US$15.3m, up from none in one year. However, it does have US$3.17m in cash offsetting this, leading to net debt of about US$12.2m.

How Healthy Is Alvopetro Energy's Balance Sheet?

According to the last reported balance sheet, Alvopetro Energy had liabilities of US$3.20m due within 12 months, and liabilities of US$24.2m due beyond 12 months. Offsetting these obligations, it had cash of US$3.17m as well as receivables valued at US$1.94m due within 12 months. So its liabilities total US$22.3m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Alvopetro Energy has a market capitalization of US$60.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Alvopetro 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.

In the last year Alvopetro Energy wasn't profitable at an EBIT level, but managed to grow its revenue by 1,093%, to US$5.1m. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Even though Alvopetro Energy managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at US$1.7m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$8.1m in negative free cash flow over the last twelve months. So in short it's a really 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 be aware of the 1 warning sign we've spotted with Alvopetro Energy .

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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