Does Razor Energy (CVE:RZE) Have A Healthy Balance Sheet?

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. We can see that Razor Energy Corp. (CVE:RZE) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Razor Energy

What Is Razor Energy's Net Debt?

The image below, which you can click on for greater detail, shows that Razor Energy had debt of CA$21.6m at the end of June 2023, a reduction from CA$82.7m over a year. On the flip side, it has CA$4.06m in cash leading to net debt of about CA$17.5m.

How Strong Is Razor Energy's Balance Sheet?

The latest balance sheet data shows that Razor Energy had liabilities of CA$66.2m due within a year, and liabilities of CA$112.8m falling due after that. On the other hand, it had cash of CA$4.06m and CA$16.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$158.3m.

This deficit casts a shadow over the CA$20.5m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Razor Energy would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Razor 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 Razor Energy had a loss before interest and tax, and actually shrunk its revenue by 3.1%, to CA$96m. That's not what we would hope to see.

Caveat Emptor

Importantly, Razor Energy had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$21m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But we note that trailing twelve month EBIT is worse than the free cash flow of CA$927k and the profit of CA$29m. So while its ongoing EBIT might disappoint, it has a fair bit going for it! 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. To that end, you should learn about the 4 warning signs we've spotted with Razor Energy (including 1 which is potentially serious) .

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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