Does Wolverine Energy and Infrastructure (CVE:WEII) Have A Healthy Balance Sheet?

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.' 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 Wolverine Energy and Infrastructure Inc. (CVE:WEII) 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 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 Wolverine Energy and Infrastructure

What Is Wolverine Energy and Infrastructure's Debt?

As you can see below, Wolverine Energy and Infrastructure had CA$93.3m of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. And it doesn't have much cash, so its net debt is about the same.

A Look At Wolverine Energy and Infrastructure's Liabilities

We can see from the most recent balance sheet that Wolverine Energy and Infrastructure had liabilities of CA$45.2m falling due within a year, and liabilities of CA$70.1m due beyond that. Offsetting these obligations, it had cash of CA$1.57m as well as receivables valued at CA$10.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$103.0m.

This deficit casts a shadow over the CA$6.44m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Wolverine Energy and Infrastructure 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 ultimately the future profitability of the business will decide if Wolverine Energy and Infrastructure can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Wolverine Energy and Infrastructure made a loss at the EBIT level, and saw its revenue drop to CA$57m, which is a fall of 41%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Wolverine Energy and Infrastructure's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CA$20m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost CA$25m in the last year. So we think buying this stock is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Wolverine Energy and Infrastructure (of which 1 makes us a bit uncomfortable!) you should know about.

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.