Health Check: How Prudently Does Wolverine Energy and Infrastructure (CVE:WEII) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Wolverine Energy and Infrastructure Inc. (CVE:WEII) makes use of debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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

How Much Debt Does Wolverine Energy and Infrastructure Carry?

The image below, which you can click on for greater detail, shows that Wolverine Energy and Infrastructure had debt of CA$107.8m at the end of March 2022, a reduction from CA$133.3m over a year. On the flip side, it has CA$3.86m in cash leading to net debt of about CA$103.9m.

How Strong Is Wolverine Energy and Infrastructure's Balance Sheet?

According to the last reported balance sheet, Wolverine Energy and Infrastructure had liabilities of CA$55.2m due within 12 months, and liabilities of CA$78.0m due beyond 12 months. Offsetting this, it had CA$3.86m in cash and CA$27.5m in receivables that were due within 12 months. So it has liabilities totalling CA$101.9m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CA$11.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Wolverine Energy and Infrastructure would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Wolverine Energy and Infrastructure's ability to maintain a healthy balance sheet going forward. 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$66m, which is a fall of 43%. 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). Indeed, it lost a very considerable CA$24m at the EBIT level. 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 burned through CA$4.9m in the last year. So we consider this a high risk stock, and we're worried its share price could sink faster than than a dingy with a great white shark attacking it. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Wolverine Energy and Infrastructure has 4 warning signs we think you should be aware of.

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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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.