Is ShaMaran Petroleum (CVE:SNM) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, ShaMaran Petroleum Corp. (CVE:SNM) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 ShaMaran Petroleum

How Much Debt Does ShaMaran Petroleum Carry?

As you can see below, ShaMaran Petroleum had US$189.6m of debt, at March 2020, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has US$4.60m in cash leading to net debt of about US$185.0m.

A Look At ShaMaran Petroleum's Liabilities

Zooming in on the latest balance sheet data, we can see that ShaMaran Petroleum had liabilities of US$206.6m due within 12 months and liabilities of US$16.6m due beyond that. Offsetting these obligations, it had cash of US$4.60m as well as receivables valued at US$14.7m due within 12 months. So it has liabilities totalling US$203.9m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the US$56.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, ShaMaran Petroleum would likely require a major re-capitalisation if it had to pay its creditors today. 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 ShaMaran Petroleum 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.

Over 12 months, ShaMaran Petroleum reported revenue of US$78m, which is a gain of 41%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, ShaMaran Petroleum still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$109.3m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through US$11.1m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. Take risks, for example - ShaMaran Petroleum has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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.
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