Is Crown Energy (NGM:CRWN) Using Too Much Debt?

Simply Wall St · 10/18 07:29

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Crown Energy AB (publ) (NGM:CRWN) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Crown Energy

What Is Crown Energy's Net Debt?

As you can see below, at the end of June 2024, Crown Energy had kr558.3m of debt, up from none a year ago. Click the image for more detail. On the flip side, it has kr207.8m in cash leading to net debt of about kr350.5m.

debt-equity-history-analysis
NGM:CRWN Debt to Equity History October 18th 2024

A Look At Crown Energy's Liabilities

Zooming in on the latest balance sheet data, we can see that Crown Energy had liabilities of kr1.72b due within 12 months and liabilities of kr901.1m due beyond that. On the other hand, it had cash of kr207.8m and kr86.7m worth of receivables due within a year. So its liabilities total kr2.33b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the kr288.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Crown Energy would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Crown Energy will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Crown Energy had a loss before interest and tax, and actually shrunk its revenue by 21%, to kr34m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Crown Energy's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping kr131m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the fact is that it incinerated kr43m of cash in the last twelve months, and has precious few liquid assets in comparison to its liabilities. So is this a high risk stock? We think so, and we'd avoid it. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Crown Energy (of which 3 are significant!) you should know about.

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.