Is CGX Energy (CVE:OYL) A Risky Investment?

Warren Buffett famously said, '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 CGX Energy Inc. (CVE:OYL) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 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 CGX Energy

How Much Debt Does CGX Energy Carry?

As you can see below, at the end of June 2021, CGX Energy had US$7.35m of debt, up from none a year ago. Click the image for more detail. But it also has US$12.0m in cash to offset that, meaning it has US$4.65m net cash.

How Strong Is CGX Energy's Balance Sheet?

According to the balance sheet data, CGX Energy had liabilities of US$28.9m due within 12 months, but no longer term liabilities. Offsetting this, it had US$12.0m in cash and US$556.6k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$16.4m.

Given CGX Energy has a market capitalization of US$487.2m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, CGX 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 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.

So How Risky Is CGX Energy?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year CGX 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$12m and booked a US$6.2m accounting loss. Given it only has net cash of US$4.65m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 example CGX Energy has 3 warning signs (and 1 which can't be ignored) we think you should know about.

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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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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