Here's Why CWC Energy Services (CVE:CWC) Can Afford Some 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that CWC Energy Services Corp. (CVE:CWC) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for CWC Energy Services

How Much Debt Does CWC Energy Services Carry?

As you can see below, CWC Energy Services had CA$28.3m of debt at September 2020, down from CA$40.9m a year prior. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is CWC Energy Services' Balance Sheet?

We can see from the most recent balance sheet that CWC Energy Services had liabilities of CA$7.69m falling due within a year, and liabilities of CA$32.8m due beyond that. On the other hand, it had cash of CA$104.0k and CA$10.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$29.7m.

CWC Energy Services has a market capitalization of CA$80.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since CWC Energy Services will need earnings to service that debt. 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.

Over 12 months, CWC Energy Services made a loss at the EBIT level, and saw its revenue drop to CA$78m, which is a fall of 31%. To be frank that doesn't bode well.

Caveat Emptor

While CWC Energy Services's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CA$6.7m at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CA$25m. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for CWC Energy Services that you should be aware of.

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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