Is AKITA Drilling (TSE:AKT.A) Weighed On By Its Debt Load?

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. Importantly, AKITA Drilling Ltd. (TSE:AKT.A) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for AKITA Drilling

What Is AKITA Drilling's Net Debt?

As you can see below, AKITA Drilling had CA$79.3m of debt at March 2021, down from CA$86.6m a year prior. However, because it has a cash reserve of CA$3.93m, its net debt is less, at about CA$75.3m.

How Healthy Is AKITA Drilling's Balance Sheet?

According to the last reported balance sheet, AKITA Drilling had liabilities of CA$20.4m due within 12 months, and liabilities of CA$83.8m due beyond 12 months. Offsetting these obligations, it had cash of CA$3.93m as well as receivables valued at CA$22.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$78.2m.

The deficiency here weighs heavily on the CA$40.1m 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. After all, AKITA Drilling would likely require a major re-capitalisation if it had to pay its creditors today. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, AKITA Drilling made a loss at the EBIT level, and saw its revenue drop to CA$93m, which is a fall of 47%. That makes us nervous, to say the least.

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$19m 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. It's fair to say the loss of CA$45m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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 instance, we've identified 3 warning signs for AKITA Drilling that you should be aware of.

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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