Stock Analysis

Crown Point Energy (CVE:CWV) Has Debt But No Earnings; Should You Worry?

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TSXV:CWV
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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Crown Point Energy Inc. (CVE:CWV) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Crown Point Energy

How Much Debt Does Crown Point Energy Carry?

As you can see below, at the end of March 2021, Crown Point Energy had US$6.48m of debt, up from US$681.7k a year ago. Click the image for more detail. On the flip side, it has US$6.27m in cash leading to net debt of about US$214.9k.

debt-equity-history-analysis
TSXV:CWV Debt to Equity History May 14th 2021

A Look At Crown Point Energy's Liabilities

Zooming in on the latest balance sheet data, we can see that Crown Point Energy had liabilities of US$7.29m due within 12 months and liabilities of US$19.6m due beyond that. Offsetting these obligations, it had cash of US$6.27m as well as receivables valued at US$938.4k due within 12 months. So its liabilities total US$19.6m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$10.8m 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. After all, Crown Point Energy would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Crown Point 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 Crown Point Energy had a loss before interest and tax, and actually shrunk its revenue by 66%, to US$9.1m. To be frank that doesn't bode well.

Caveat Emptor

While Crown Point Energy's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$3.7m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of US$44k over the last twelve months. So suffice it to say we consider the stock to be risky. 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. For example Crown Point Energy has 3 warning signs (and 1 which is concerning) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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