Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Crescent Energy Company (NYSE:CRGY) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is Crescent Energy's Debt?
As you can see below, at the end of March 2024, Crescent Energy had US$1.75b of debt, up from US$1.24b a year ago. Click the image for more detail. And it doesn't have much cash, so its net debt is about the same.
NYSE:CRGY Debt to Equity History June 17th 2024
A Look At Crescent Energy's Liabilities
According to the last reported balance sheet, Crescent Energy had liabilities of US$748.1m due within 12 months, and liabilities of US$2.51b due beyond 12 months. Offsetting this, it had US$5.32m in cash and US$469.7m in receivables that were due within 12 months. So its liabilities total US$2.78b more than the combination of its cash and short-term receivables.
Given this deficit is actually higher than the company's market capitalization of US$2.11b, we think shareholders really should watch Crescent Energy's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Even though Crescent Energy's debt is only 1.6, its interest cover is really very low at 1.4. In large part that's it has so much depreciation and amortisation. These charges may be non-cash, so they could be excluded when it comes to paying down debt. But the accounting charges are there for a reason -- some assets are seen to be losing value. In any case, it's safe to say the company has meaningful debt. Shareholders should be aware that Crescent Energy's EBIT was down 84% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Crescent Energy's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Considering the last two years, Crescent Energy actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.
Our View
To be frank both Crescent Energy's interest cover and its track record of (not) growing its EBIT make us rather uncomfortable with its debt levels. Having said that, its ability handle its debt, based on its EBITDA, isn't such a worry. After considering the datapoints discussed, we think Crescent Energy has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Crescent Energy is showing 3 warning signs in our investment analysis , and 2 of those are concerning...
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.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
ウォーレン・バフェットはよく「変動性はリスクと同義語ではないです。」と言いました。このため、あなたがどの株式がリスクがあるか考えるとき、負債を考慮する必要があることは明らかです。なぜなら、あまりにも多くの負債は会社を沈める可能性があるからです。 Crescent Energy Company(NYSE:CRGY)は、ビジネスに負債を使用しています。しかし、この負債は株主にとって懸念事項なのでしょうか?
債務が危険になるのはいつですか?
ある株式がどのくらいリスクがあるのかを考えるときに債務を考慮することが必要です。そのため、あまりに多くの債務は会社を沈める原因となるため注意が必要です。 Crescent Energy Company(NYSE:CRGY)がビジネスで債務を使用していることは明らかです。 しかし、この債務は株主にとって懸念事項でしょうか? 債務やその他の負債は、フリーキャッシュフローで簡単に債務を返済できないか、魅力的な価格で資金調達できないとき、ビジネスにとってリスクが生じます。 カピタリズムは「クリエイティブディストラクション」というプロセスが必要であり、失敗した企業は銀行家によって残酷に解散されます。 しかし、より頻繁な(それでも高価な)出来事は、企業が株式を安い値段で発行することで、株主を永久に希薄化し、財務状況を立て直すことを強制される出来事です。 しかしながら、株式の希薄化を防ぐために、債務は高い投資リターンで成長するビジネスが資本を必要とする場合に非常に有効なツールとなります。 債務の使用について考えるとき、まず現金と債務を一緒に見ます。
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オーストラリアでは、moomooの投資商品及びサービスはMoomoo Securities Australia Limitedによって提供され、オーストラリア証券投資委員会(ASIC)の管理を受けております(AFSL No. 224663)。「金融サービスガイド」、「利用規約」、「プライバシーポリシー」などの詳細は、Moomoo Securities Australia Limitedのウェブサイトhttps://www.moomoo.com/auでご確認いただけます。