We Think CGX Energy (CVE:OYL) Has A Fair Chunk Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies CGX Energy Inc. (CVE:OYL) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for CGX Energy

How Much Debt Does CGX Energy Carry?

As you can see below, at the end of September 2022, CGX Energy had US$52.3m of debt, up from US$18.3m a year ago. Click the image for more detail. However, because it has a cash reserve of US$10.4m, its net debt is less, at about US$41.9m.

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$110.4m due within 12 months and no liabilities due beyond that. Offsetting this, it had US$10.4m in cash and US$238.5k in receivables that were due within 12 months. So it has liabilities totalling US$99.8m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since CGX Energy has a market capitalization of US$300.2m, 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since CGX Energy will need earnings to service that debt. 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$12m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$132m of cash over the last year. So in short it's a really risky stock. 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. For instance, we've identified 3 warning signs for CGX Energy that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.