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

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. We can see that Wolverine Energy and Infrastructure Inc. (CVE:WEII) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Wolverine Energy and Infrastructure

What Is Wolverine Energy and Infrastructure's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Wolverine Energy and Infrastructure had CA$94.7m of debt in September 2021, down from CA$123.2m, one year before. However, it does have CA$3.73m in cash offsetting this, leading to net debt of about CA$91.0m.

A Look At Wolverine Energy and Infrastructure's Liabilities

The latest balance sheet data shows that Wolverine Energy and Infrastructure had liabilities of CA$38.2m due within a year, and liabilities of CA$85.4m falling due after that. Offsetting these obligations, it had cash of CA$3.73m as well as receivables valued at CA$11.9m due within 12 months. So it has liabilities totalling CA$108.0m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CA$22.6m 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'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$96m, which is a fall of 53%. That makes us nervous, to say the least.

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$29m 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. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized CA$10m 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. For example, we've discovered 3 warning signs for Wolverine Energy and Infrastructure (2 can't be ignored!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.