Is AKITA Drilling (TSE:AKT.A) Using Too Much 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies AKITA Drilling Ltd. (TSE:AKT.A) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View 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 at June 2022 AKITA Drilling had debt of CA$94.6m, up from CA$74.5m in one year. However, because it has a cash reserve of CA$4.07m, its net debt is less, at about CA$90.5m.

A Look At AKITA Drilling's Liabilities

According to the last reported balance sheet, AKITA Drilling had liabilities of CA$25.4m due within 12 months, and liabilities of CA$103.4m due beyond 12 months. On the other hand, it had cash of CA$4.07m and CA$33.2m worth of receivables due within a year. So it has liabilities totalling CA$91.6m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CA$53.0m company, like a colossus towering over mere mortals. 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. 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 AKITA Drilling'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 AKITA Drilling wasn't profitable at an EBIT level, but managed to grow its revenue by 78%, to CA$152m. 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. 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. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CA$23m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with AKITA Drilling , and understanding them should be part of your investment process.

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.