David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies enCore Energy Corp. (CVE:EU) makes use of debt. But is this debt a concern to shareholders?
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, 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. When we think about a company's use of debt, we first look at cash and debt together.
The image below, which you can click on for greater detail, shows that at June 2023 enCore Energy had debt of US$56.9m, up from none in one year. However, it also had US$2.60m in cash, and so its net debt is US$54.3m.
We can see from the most recent balance sheet that enCore Energy had liabilities of US$2.50m falling due within a year, and liabilities of US$67.9m due beyond that. Offsetting this, it had US$2.60m in cash and US$1.54m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$66.2m.
Since publicly traded enCore Energy shares are worth a total of US$408.2m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if enCore Energy can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Since enCore Energy doesn't have significant operating revenue, shareholders must hope it'll sell some fossil fuels, before it runs out of money.
Importantly, enCore Energy had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$24m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$91m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 5 warning signs we've spotted with enCore Energy (including 3 which are potentially serious) .
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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