VVC Exploration (CVE:VVC) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that VVC Exploration Corporation (CVE:VVC) does use debt in its business. But is this debt a concern to shareholders?

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. 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, 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.

See our latest analysis for VVC Exploration

How Much Debt Does VVC Exploration Carry?

The image below, which you can click on for greater detail, shows that at October 2023 VVC Exploration had debt of CA$2.15m, up from CA$2.06m in one year. But it also has CA$5.00m in cash to offset that, meaning it has CA$2.85m net cash.

How Healthy Is VVC Exploration's Balance Sheet?

We can see from the most recent balance sheet that VVC Exploration had liabilities of CA$9.04m falling due within a year, and liabilities of CA$614.4k due beyond that. Offsetting these obligations, it had cash of CA$5.00m as well as receivables valued at CA$40.3k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$4.61m.

Of course, VVC Exploration has a market capitalization of CA$25.8m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, VVC Exploration boasts net cash, so it's fair to say it does not have a heavy debt load! 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 VVC Exploration will need earnings to service that debt. 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?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that VVC Exploration had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CA$2.8m and booked a CA$3.6m accounting loss. However, it has net cash of CA$2.85m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that VVC Exploration is showing 4 warning signs in our investment analysis , and 2 of those are a bit unpleasant...

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.

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.