Stock Analysis

We Think Australis Oil & Gas (ASX:ATS) Has A Fair Chunk Of Debt

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ASX:ATS
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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Australis Oil & Gas Limited (ASX:ATS) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Australis Oil & Gas

How Much Debt Does Australis Oil & Gas Carry?

You can click the graphic below for the historical numbers, but it shows that Australis Oil & Gas had US$16.7m of debt in December 2021, down from US$19.9m, one year before. On the flip side, it has US$9.25m in cash leading to net debt of about US$7.44m.

debt-equity-history-analysis
ASX:ATS Debt to Equity History April 28th 2022

How Healthy Is Australis Oil & Gas' Balance Sheet?

The latest balance sheet data shows that Australis Oil & Gas had liabilities of US$12.8m due within a year, and liabilities of US$16.2m falling due after that. Offsetting these obligations, it had cash of US$9.25m as well as receivables valued at US$3.01m due within 12 months. So its liabilities total US$16.7m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Australis Oil & Gas has a market capitalization of US$57.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Australis Oil & Gas's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Australis Oil & Gas had a loss before interest and tax, and actually shrunk its revenue by 15%, to US$22m. We would much prefer see growth.

Caveat Emptor

While Australis Oil & Gas's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost US$849k at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of US$2.4m into a profit. So to be blunt we do think it is risky. 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. For example, we've discovered 2 warning signs for Australis Oil & Gas that you should be aware of before investing here.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Australis Oil & Gas is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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