Is CWC Energy Services (CVE:CWC) A Risky Investment?

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.' 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. As with many other companies CWC Energy Services Corp. (CVE:CWC) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for CWC Energy Services

What Is CWC Energy Services's Net Debt?

The image below, which you can click on for greater detail, shows that CWC Energy Services had debt of CA$21.4m at the end of June 2021, a reduction from CA$26.0m over a year. And it doesn't have much cash, so its net debt is about the same.

How Strong Is CWC Energy Services' Balance Sheet?

According to the last reported balance sheet, CWC Energy Services had liabilities of CA$7.51m due within 12 months, and liabilities of CA$28.3m due beyond 12 months. Offsetting this, it had CA$90.0k in cash and CA$13.6m in receivables that were due within 12 months. So it has liabilities totalling CA$22.0m more than its cash and near-term receivables, combined.

CWC Energy Services has a market capitalization of CA$83.3m, 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since CWC Energy Services will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, CWC Energy Services made a loss at the EBIT level, and saw its revenue drop to CA$72m, which is a fall of 25%. To be frank that doesn't bode well.

Caveat Emptor

Not only did CWC Energy Services's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CA$6.0m. 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. We would feel better if it turned its trailing twelve month loss of CA$1.9m into a profit. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that CWC Energy Services is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.

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