Is Petro-Victory Energy (CVE:VRY) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Petro-Victory Energy Corp. (CVE:VRY) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Petro-Victory Energy

What Is Petro-Victory Energy's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Petro-Victory Energy had US$4.78m of debt, an increase on US$3.40m, over one year. However, its balance sheet shows it holds US$5.22m in cash, so it actually has US$436.8k net cash.

How Healthy Is Petro-Victory Energy's Balance Sheet?

According to the last reported balance sheet, Petro-Victory Energy had liabilities of US$1.73m due within 12 months, and liabilities of US$5.29m due beyond 12 months. On the other hand, it had cash of US$5.22m and US$65.2k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.73m.

Since publicly traded Petro-Victory Energy shares are worth a total of US$26.0m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Petro-Victory Energy boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Petro-Victory 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.

In the last year Petro-Victory Energy wasn't profitable at an EBIT level, but managed to grow its revenue by 171%, to US$1.1m. So there's no doubt that shareholders are cheering for growth

So How Risky Is Petro-Victory Energy?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Petro-Victory 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$6.2m and booked a US$3.6m accounting loss. Given it only has net cash of US$436.8k, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, Petro-Victory Energy's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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 instance, we've identified 5 warning signs for Petro-Victory Energy (3 make us uncomfortable) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.