Health Check: How Prudently Does Amplitude Energy (ASX:AEL) Use 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. As with many other companies Amplitude Energy Limited (ASX:AEL) makes use of debt. But should shareholders be worried about its use of debt?

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. 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. 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.

What Is Amplitude Energy's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Amplitude Energy had AU$290.3m of debt, an increase on AU$204.9m, over one year. However, because it has a cash reserve of AU$51.0m, its net debt is less, at about AU$239.3m.

A Look At Amplitude Energy's Liabilities

We can see from the most recent balance sheet that Amplitude Energy had liabilities of AU$48.5m falling due within a year, and liabilities of AU$751.6m due beyond that. On the other hand, it had cash of AU$51.0m and AU$32.2m worth of receivables due within a year. So it has liabilities totalling AU$716.9m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's AU$583.3m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Amplitude 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.

Check out our latest analysis for Amplitude Energy

In the last year Amplitude Energy wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to AU$247m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Amplitude Energy managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost AU$569k at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through AU$134m in negative free cash flow over the last year. That means it's on the risky side of things. 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. To that end, you should be aware of the 1 warning sign we've spotted with Amplitude Energy .

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.