Is Wolverine Energy and Infrastructure (CVE:WEII) Using Debt Sensibly?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

View 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 at September 2020 Wolverine Energy and Infrastructure had debt of CA$123.2m, up from CA$114.3m in one year. However, it also had CA$3.90m in cash, and so its net debt is CA$119.3m.

A Look At Wolverine Energy and Infrastructure's Liabilities

Zooming in on the latest balance sheet data, we can see that Wolverine Energy and Infrastructure had liabilities of CA$67.4m due within 12 months and liabilities of CA$104.2m due beyond that. Offsetting this, it had CA$3.90m in cash and CA$28.7m in receivables that were due within 12 months. So it has liabilities totalling CA$139.0m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CA$54.1m 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Wolverine Energy and Infrastructure wasn't profitable at an EBIT level, but managed to grow its revenue by 66%, to CA$205m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Wolverine Energy and Infrastructure's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable CA$11m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized CA$8.9m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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, and 1 of them makes us a bit uncomfortable.

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. 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.
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