Does AKITA Drilling (TSE:AKT.A) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, AKITA Drilling Ltd. (TSE:AKT.A) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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.

Check out our latest analysis for AKITA Drilling

What Is AKITA Drilling's Debt?

The image below, which you can click on for greater detail, shows that AKITA Drilling had debt of CA$74.3m at the end of December 2020, a reduction from CA$84.0m over a year. However, it does have CA$7.11m in cash offsetting this, leading to net debt of about CA$67.2m.

A Look At AKITA Drilling's Liabilities

The latest balance sheet data shows that AKITA Drilling had liabilities of CA$15.4m due within a year, and liabilities of CA$83.9m falling due after that. On the other hand, it had cash of CA$7.11m and CA$15.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$77.0m.

The deficiency here weighs heavily on the CA$39.1m 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 definitely think shareholders need to watch this one closely. At the end of the day, AKITA Drilling would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if AKITA Drilling can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year AKITA Drilling had a loss before interest and tax, and actually shrunk its revenue by 32%, to CA$120m. To be frank that doesn't bode well.

Caveat Emptor

While AKITA Drilling'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 a very considerable CA$15m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of CA$93m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that AKITA Drilling is showing 3 warning signs in our investment analysis , 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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