Athabasca Oil (TSE:ATH) Has A Rock Solid 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.' 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 Athabasca Oil Corporation (TSE:ATH) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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

What Is Athabasca Oil's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Athabasca Oil had CA$191.0m of debt, an increase on CA$181.6m, over one year. However, it does have CA$303.4m in cash offsetting this, leading to net cash of CA$112.4m.

How Strong Is Athabasca Oil's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Athabasca Oil had liabilities of CA$208.9m due within 12 months and liabilities of CA$334.0m due beyond that. On the other hand, it had cash of CA$303.4m and CA$148.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$91.4m.

Of course, Athabasca Oil has a market capitalization of CA$2.94b, 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!

On top of that, Athabasca Oil grew its EBIT by 79% over the last twelve months, and that growth will make it easier to handle its debt. 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 Athabasca Oil'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Athabasca Oil may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Athabasca Oil recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Athabasca Oil has CA$112.4m in net cash. And it impressed us with its EBIT growth of 79% over the last year. So is Athabasca Oil's debt a risk? It doesn't seem so to us. 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 3 warning signs with Athabasca Oil , and understanding them should be part of your investment process.

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.