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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that VVC Exploration Corporation (CVE:VVC) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 VVC Exploration
How Much Debt Does VVC Exploration Carry?
As you can see below, VVC Exploration had CA$2.13m of debt, at April 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CA$2.72m in cash offsetting this, leading to net cash of CA$589.8k.
How Healthy Is VVC Exploration's Balance Sheet?
According to the last reported balance sheet, VVC Exploration had liabilities of CA$9.14m due within 12 months, and liabilities of CA$285.0k due beyond 12 months. On the other hand, it had cash of CA$2.72m and CA$41.0k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$6.66m.
This deficit isn't so bad because VVC Exploration is worth CA$17.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, VVC Exploration boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is VVC Exploration's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Given its lack of meaningful operating revenue, investors are probably hoping that VVC Exploration finds some valuable resources, before it runs out of money.
So How Risky Is VVC Exploration?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year VVC Exploration had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$4.2m of cash and made a loss of CA$2.5m. Given it only has net cash of CA$589.8k, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 5 warning signs for VVC Exploration (4 shouldn't be ignored!) that you should be aware of before investing here.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
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About TSXV:VVC
VVC Exploration
Engages in the acquisition, exploration, and development of helium, natural gas, and precious metals mineral properties in Mexico, the United States, and Canada.
Moderate with imperfect balance sheet.