David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies Cortus Energy AB (publisher) (STO:CE) uses debt. But does this debt worry shareholders?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we look at debt levels, we first consider cash and debt levels, together.
Discover our latest analysis for Cortus Energy
What is Cortus Energy’s debt?
As you can see below, Cortus Energy had a debt of 15.0 million kr in December 2021, compared to 81.9 million kr the previous year. But he also has 48.8 million kr in cash to offset this, which means he has a net cash of 33.8 million kr.
How strong is Cortus Energy’s balance sheet?
According to the latest published balance sheet, Cortus Energy had liabilities of 28.9 million kr due within 12 months and liabilities of 11.4 million kr due beyond 12 months. In return, it had 48.8 million kr in cash and 2.15 million kr in debt due within 12 months. Thus, he can boast of having 10.7 million kr more cash than total Passives.
Given the size of Cortus Energy, it appears its cash is well balanced against its total liabilities. It is therefore very unlikely that the 558.7 million kr company will run out of cash, but it is still worth keeping an eye on the balance sheet. Simply put, the fact that Cortus Energy has more cash than debt is arguably a good indication that it can safely manage its debt. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; since Cortus Energy will need revenue to repay this debt. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.
Given its lack of significant operating revenue, Cortus Energy shareholders are no doubt hoping it can finance itself until it can sell fuels.
So how risky is Cortus Energy?
Statistically speaking, businesses that lose money are riskier than those that make money. And we note that Cortus Energy posted a loss in earnings before interest and taxes (EBIT) over the past year. And during the same period, it recorded a negative free cash outflow of 73 million kr and recorded an accounting loss of 79 million kr. With only 33.8 million kr on the balance sheet, it looks like it will soon have to raise capital again. Overall, its balance sheet doesn’t look too risky, at the moment, but we’re still cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we have identified 6 warning signs for Cortus Energy (3 are significant) of which you should be aware.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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