Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say this when he says “The biggest risk in investing is not price volatility, but if you will suffer a loss. permanent capital “. It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. Above all, New Zealand Energy Corp. (CVE: NZ) is in debt. But does this debt worry shareholders?

What risk does debt entail?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, many companies use debt to finance their growth without negative consequences. When we look at debt levels, we first look at cash and debt levels, together.

See our latest analysis for New Zealand energy

What is New Zealand’s energy debt?

The image below, which you can click for more details, shows that in September 2021, New Zealand Energy was in debt of C $ 2.00 million, down from zero in a year. However, he has CA $ 709.2K in cash offsetting this, which leads to net debt of approximately CA $ 1.29M.

A look at New Zealand Energy’s liabilities

We can see from the most recent balance sheet that New Zealand Energy had C $ 3.62 million liabilities due within one year and C $ 8.70 million liabilities due. beyond. On the other hand, he had cash of CA $ 709.2k and receivables worth CA $ 1.03 million within one year. Its liabilities therefore total C $ 10.6 million more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the C $ 4.18 million society, like a colossus towering over mere mortals. We would therefore monitor its record closely, without a doubt. Ultimately, New Zealand Energy would likely need a major recapitalization if its creditors demanded repayment. There is no doubt that we learn the most about debt from the balance sheet. But it is New Zealand Energy’s earnings that will influence the way the balance sheet looks going forward. So if you want to know more about its profits, it may be worth checking out this long term profit trend chart.

Over 12 months, New Zealand Energy recorded a loss in EBIT and saw sales fall to C $ 4.9 million, a decrease of 27%. To be frank, that doesn’t bode well.

Emptor Warning

Not only has New Zealand Energy’s revenue declined over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). His EBIT loss was CA $ 774,000. The combination of this information with the significant liabilities that we have already mentioned makes us very hesitant about this stock, to say the least. That said, the company may change course. But we think that’s unlikely, given he lacks liquid assets and has spent C $ 2.1 million in the past year. So we think this stock is risky, like walking through a dirty dog ​​park with a mask on. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. To this end, you should inquire about the 4 warning signs we spotted with New Zealand Energy (including 1 which is worrying).

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% freeat present.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.