AKITA Drilling (TSE:AKT.A) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that AKITA Drilling Ltd. (TSE:AKT.A) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, 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 AKITA Drilling

How Much Debt Does AKITA Drilling Carry?

The image below, which you can click on for greater detail, shows that at March 2022 AKITA Drilling had debt of CA$94.5m, up from CA$79.3m in one year. However, it does have CA$4.45m in cash offsetting this, leading to net debt of about CA$90.1m.

How Healthy Is AKITA Drilling's Balance Sheet?

The latest balance sheet data shows that AKITA Drilling had liabilities of CA$30.6m due within a year, and liabilities of CA$102.4m falling due after that. Offsetting these obligations, it had cash of CA$4.45m as well as receivables valued at CA$36.5m due within 12 months. So its liabilities total CA$92.0m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of CA$87.6m, we think shareholders really should watch AKITA Drilling's debt levels, like a parent watching their child ride a bike for the first time. 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. 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 AKITA Drilling'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.

Over 12 months, AKITA Drilling reported revenue of CA$128m, which is a gain of 37%, 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.

Caveat Emptor

While we can certainly appreciate AKITA Drilling's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping CA$20m. When we look at that alongside the significant liabilities, we're not particularly confident 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 CA$19m in negative free cash flow over the last year. That means it's on the risky side of things. 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. To that end, you should be aware of the 3 warning signs we've spotted with AKITA Drilling .

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.

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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.