Auditors Have Doubts About CGX Energy (CVE:OYL)

The harsh reality for CGX Energy Inc. (CVE:OYL) shareholders is that its auditors, Ernst & Young LLP, expressed doubts about its ability to continue as a going concern, in its reported results to December 2021. It is therefore fair to assume that, based on those financials, the company should strengthen its balance sheet in the short term, perhaps by issuing shares.

If the company does have to issue more shares, potential investors will be sure to consider how desperate it is for capital. So it is suddenly extremely important to consider whether the company is taking too much risk on its balance sheet. The big consideration is whether it can repay its debt, since in the worst case scenario, creditors could force the company to bankruptcy.

Check out our latest analysis for CGX Energy

What Is CGX Energy's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 CGX Energy had US$18.5m of debt, an increase on none, over one year. However, it also had US$17.2m in cash, and so its net debt is US$1.28m.

How Strong Is CGX Energy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CGX Energy had liabilities of US$60.4m due within 12 months and no liabilities due beyond that. Offsetting this, it had US$17.2m in cash and US$8.64m in receivables that were due within 12 months. So its liabilities total US$34.6m more than the combination of its cash and short-term receivables.

Of course, CGX Energy has a market capitalization of US$438.5m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, CGX Energy has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But it is CGX 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.

Given its lack of meaningful operating revenue, CGX Energy shareholders no doubt hope it can fund itself until it can sell some combustibles.

Caveat Emptor

Importantly, CGX Energy had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$11m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$73m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. We're too cautious to want to invest in a company after an auditor has expressed doubts about its ability to continue as a going concern. That's because we find it more comfortable to invest in companies that always keep the balance sheet reasonably strong. 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. Case in point: We've spotted 5 warning signs for CGX Energy you should be aware of, and 3 of them are significant.

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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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.