Does Criterium Energy (CVE:CEQ) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Criterium Energy Ltd. (CVE:CEQ) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Criterium Energy

How Much Debt Does Criterium Energy Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Criterium Energy had CA$37.8m of debt, an increase on none, over one year. However, because it has a cash reserve of CA$7.10m, its net debt is less, at about CA$30.7m.

How Healthy Is Criterium Energy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Criterium Energy had liabilities of CA$17.0m due within 12 months and liabilities of CA$76.7m due beyond that. On the other hand, it had cash of CA$7.10m and CA$2.91m worth of receivables due within a year. So it has liabilities totalling CA$83.7m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CA$11.9m 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. At the end of the day, Criterium Energy would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Criterium Energy's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Criterium Energy wasn't profitable at an EBIT level, but managed to grow its revenue by 10,975%, to CA$16m. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Despite the top line growth, Criterium Energy still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CA$4.4m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it burned through CA$4.0m in the last year. So we consider this a high risk stock, and we're worried its share price could sink faster than than a dingy with a great white shark attacking it. 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 example, we've discovered 5 warning signs for Criterium Energy that you should be aware of before investing here.

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.