Health Check: How Prudently Does Southern Energy (CVE:SOU) Use 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.' 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 Southern Energy Corp. (CVE:SOU) makes use of debt. But is this debt a concern to shareholders?

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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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Southern Energy's Debt?

The image below, which you can click on for greater detail, shows that Southern Energy had debt of US$14.5m at the end of September 2025, a reduction from US$20.9m over a year. On the flip side, it has US$962.0k in cash leading to net debt of about US$13.6m.

How Strong Is Southern Energy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Southern Energy had liabilities of US$15.7m due within 12 months and liabilities of US$19.8m due beyond that. Offsetting these obligations, it had cash of US$962.0k as well as receivables valued at US$1.82m due within 12 months. So it has liabilities totalling US$32.7m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the US$18.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Southern Energy would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Southern 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.

Check out our latest analysis for Southern Energy

Over 12 months, Southern Energy made a loss at the EBIT level, and saw its revenue drop to US$14m, which is a fall of 2.2%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Southern Energy produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$3.2m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$1.1m over the last twelve months. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 5 warning signs with Southern Energy (at least 3 which are concerning) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.