Yahoo Finance Is Essential Energy Services (TSE:ESN) Using Too Much Debt?
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.' 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. Importantly, Essential Energy Services Ltd. (TSE:ESN) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Essential Energy Services
What Is Essential Energy Services's Debt?
As you can see below, at the end of March 2022, Essential Energy Services had CA$2.60m of debt, up from CA$53.0k a year ago. Click the image for more detail. However, its balance sheet shows it holds CA$3.68m in cash, so it actually has CA$1.08m net cash.
A Look At Essential Energy Services' Liabilities
The latest balance sheet data shows that Essential Energy Services had liabilities of CA$24.3m due within a year, and liabilities of CA$15.5m falling due after that. Offsetting this, it had CA$3.68m in cash and CA$30.8m in receivables that were due within 12 months. So it has liabilities totalling CA$5.27m more than its cash and near-term receivables, combined.
Since publicly traded Essential Energy Services shares are worth a total of CA$57.2m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Essential Energy Services boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Essential Energy Services can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Essential Energy Services reported revenue of CA$129m, which is a gain of 52%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Essential Energy Services?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Essential Energy Services had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CA$93k and booked a CA$13m accounting loss. Given it only has net cash of CA$1.08m, the company may need to raise more capital if it doesn't reach break-even soon. Essential Energy Services's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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 2 warning signs for Essential Energy Services (of which 1 is a bit unpleasant!) you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here