Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. 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 note that Crescent Point Energy Corp. (TSE:CPG) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Crescent Point Energy Carry?
The image below, which you can click on for greater detail, shows that Crescent Point Energy had debt of CA$3.58b at the end of September 2019, a reduction from CA$4.16b over a year. On the flip side, it has CA$122.9m in cash leading to net debt of about CA$3.46b.
A Look At Crescent Point Energy's Liabilities
According to the last reported balance sheet, Crescent Point Energy had liabilities of CA$992.6m due within 12 months, and liabilities of CA$4.69b due beyond 12 months. Offsetting this, it had CA$122.9m in cash and CA$336.7m in receivables that were due within 12 months. So its liabilities total CA$5.23b more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the CA$2.83b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet." So we'd watch its balance sheet closely, without a doubt At the end of the day, Crescent Point Energy would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Crescent Point Energy 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.
In the last year Crescent Point Energy had negative earnings before interest and tax, and actually shrunk its revenue by 15%, to CA$2.9b. We would much prefer see growth.
While Crescent Point Energy's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CA$2.9b. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of CA$2.5b didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Crescent Point Energy insider transactions.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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