Stock Analysis

Health Check: How Prudently Does Crown Point Energy (CVE:CWV) Use Debt?

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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. 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 Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Crown Point Energy

How Much Debt Does Crown Point Energy Carry?

As you can see below, at the end of September 2020, Crown Point Energy had US$1.67m of debt, up from none a year ago. Click the image for more detail. But it also has US$1.80m in cash to offset that, meaning it has US$122.6k net cash.

TSXV:CWV Debt to Equity History January 23rd 2021

How Healthy Is Crown Point Energy's Balance Sheet?

According to the last reported balance sheet, Crown Point Energy had liabilities of US$5.90m due within 12 months, and liabilities of US$7.79m due beyond 12 months. On the other hand, it had cash of US$1.80m and US$913.6k worth of receivables due within a year. So it has liabilities totalling US$11.0m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Crown Point Energy has a market capitalization of US$21.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Crown Point Energy boasts net cash, so it's fair to say it does not have a heavy debt load! 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 74%, to US$11m. That makes us nervous, to say the least.

So How Risky Is Crown Point Energy?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Crown Point Energy had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$5.2m and booked a US$8.7m accounting loss. Given it only has net cash of US$122.6k, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 instance, we've identified 2 warning signs for Crown Point Energy (1 doesn't sit too well with us) you should be aware of.

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.

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