Share Dilution

Is Vital Energy (CVE: VUX) a risky investment?


Warren Buffett said: “Volatility is far from synonymous with risk”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We can see that Vital Energy Inc. (CVE: VUX) uses debt in its business. But the real question is whether this debt makes the business risky.

When is debt dangerous?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. 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. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

See our latest review for Vital Energy

What is Vital Energy’s net debt?

As you can see below, Vital Energy had a debt of C $ 3.86 million, as of June 2021, which is roughly the same as the year before. You can click on the graph for more details. On the other hand, he has CA $ 826.9K in cash, resulting in net debt of approximately CA $ 3.03M.

TSXV: VUX History of debt to equity September 15, 2021

How healthy is Vital Energy’s track record?

We can see from the most recent balance sheet that Vital Energy had a liability of C $ 5.57 million due within one year and a liability of C $ 1.63 million beyond that. In compensation for these obligations, it had cash of C $ 826.9 K as well as receivables valued at C $ 1.14 M due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by C $ 5.23 million.

This is a mountain of leverage compared to its market capitalization of C $ 6.58 million. If its lenders asked it to consolidate the balance sheet, shareholders would likely face severe dilution. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in isolation; since Vital Energy will need income to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.

Over 12 months, Vital Energy reported sales of C $ 5.9 million, a gain of 25%, although it reported no profit before interest and taxes. Hopefully the business will be able to move towards profitability.

Emptor Warning

Despite revenue growth, Vital Energy has consistently recorded a loss of profit before interest and taxes (EBIT) over the past year. Its loss of EBIT amounted to Cdn $ 6.0 million. When we look at this and recall the liabilities on its balance sheet, versus the cash flow, it seems unwise to us that the company has debt. We therefore believe that its record is a bit strained, but not irreparable. Another reason to be cautious is that it has lost CA $ 267k in negative free cash flow over the past twelve months. So, to be frank, we think it’s risky. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 4 warning signs with Vital Energy (at least 3 that are potentially serious), and understanding them should be part of your investment process.

Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash growth net stocks today.

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