Athabasca Oil (TSE:ATH) Could Easily Take On More Debt

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.' 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. As with many other companies Athabasca Oil Corporation (TSE:ATH) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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 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 Athabasca Oil

How Much Debt Does Athabasca Oil Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Athabasca Oil had CA$195.6m of debt, an increase on CA$182.4m, over one year. However, its balance sheet shows it holds CA$334.9m in cash, so it actually has CA$139.2m net cash.

A Look At Athabasca Oil's Liabilities

Zooming in on the latest balance sheet data, we can see that Athabasca Oil had liabilities of CA$198.2m due within 12 months and liabilities of CA$361.5m due beyond that. On the other hand, it had cash of CA$334.9m and CA$113.9m worth of receivables due within a year. So its liabilities total CA$110.9m more than the combination of its cash and short-term receivables.

Of course, Athabasca Oil has a market capitalization of CA$2.70b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Athabasca Oil boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Athabasca Oil grew its EBIT by 253% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Athabasca Oil 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Athabasca Oil has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Athabasca Oil recorded free cash flow worth a fulsome 88% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Athabasca Oil has CA$139.2m in net cash. And it impressed us with free cash flow of CA$288m, being 88% of its EBIT. So we don't think Athabasca Oil's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Athabasca Oil (at least 1 which shouldn't be ignored) , 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.