Does Capricorn Energy (LON:CNE) Have A Healthy Balance Sheet?

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.' 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 Capricorn Energy PLC (LON:CNE) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Capricorn Energy

How Much Debt Does Capricorn Energy Carry?

You can click the graphic below for the historical numbers, but it shows that Capricorn Energy had US$106.5m of debt in June 2024, down from US$124.5m, one year before. However, it does have US$148.3m in cash offsetting this, leading to net cash of US$41.8m.

A Look At Capricorn Energy's Liabilities

According to the last reported balance sheet, Capricorn Energy had liabilities of US$136.7m due within 12 months, and liabilities of US$115.8m due beyond 12 months. On the other hand, it had cash of US$148.3m and US$191.3m worth of receivables due within a year. So it actually has US$87.1m more liquid assets than total liabilities.

This surplus liquidity suggests that Capricorn Energy's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Capricorn Energy boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Capricorn Energy's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Capricorn Energy made a loss at the EBIT level, and saw its revenue drop to US$183m, which is a fall of 4.2%. We would much prefer see growth.

So How Risky Is Capricorn Energy?

While Capricorn Energy lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$12m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Capricorn Energy .

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.