Yahoo Finance Here's Why Arrow Exploration (CVE:AXL) Has A Meaningful Debt Burden
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 note that Arrow Exploration Corp. (CVE:AXL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Arrow Exploration
What Is Arrow Exploration's Debt?
The image below, which you can click on for greater detail, shows that Arrow Exploration had debt of US$3.35m at the end of December 2021, a reduction from US$5.80m over a year. But on the other hand it also has US$11.2m in cash, leading to a US$7.85m net cash position.
How Healthy Is Arrow Exploration's Balance Sheet?
We can see from the most recent balance sheet that Arrow Exploration had liabilities of US$4.80m falling due within a year, and liabilities of US$12.4m due beyond that. Offsetting this, it had US$11.2m in cash and US$745.4k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$5.29m.
Given Arrow Exploration has a market capitalization of US$50.5m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Arrow Exploration boasts net cash, so it's fair to say it does not have a heavy debt load!
We also note that Arrow Exploration improved its EBIT from a last year's loss to a positive US$3.2m. 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 Arrow Exploration'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Arrow Exploration has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Arrow Exploration saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Summing up
While Arrow Exploration does have more liabilities than liquid assets, it also has net cash of US$7.85m. So while Arrow Exploration does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Arrow Exploration is showing 4 warning signs in our investment analysis , and 2 of those don't sit too well with us...
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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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.
