Is Wolverine Energy and Infrastructure (CVE:WEII) Using Debt In A Risky Way?

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.' 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. Importantly, Wolverine Energy and Infrastructure Inc. (CVE:WEII) does carry debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Wolverine Energy and Infrastructure

How Much Debt Does Wolverine Energy and Infrastructure Carry?

As you can see below, Wolverine Energy and Infrastructure had CA$82.6m of debt at June 2023, down from CA$93.5m a year prior. However, because it has a cash reserve of CA$2.44m, its net debt is less, at about CA$80.1m.

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

The latest balance sheet data shows that Wolverine Energy and Infrastructure had liabilities of CA$40.2m due within a year, and liabilities of CA$65.6m falling due after that. Offsetting this, it had CA$2.44m in cash and CA$7.42m in receivables that were due within 12 months. So its liabilities total CA$95.9m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CA$4.29m 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 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. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Wolverine Energy and Infrastructure will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Wolverine Energy and Infrastructure reported revenue of CA$57m, which is a gain of 3.4%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Wolverine Energy and Infrastructure had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$16m. 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 the reality is that it is low on liquid assets relative to liabilities, and it lost CA$22m in the last year. So we think buying this stock is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Wolverine Energy and Infrastructure you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.