Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk.’ 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, Baytex Energy Corp. (TSE:BTE) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Baytex Energy Carry?
The image below, which you can click on for greater detail, shows that at March 2019 Baytex Energy had debt of CA$2.11b, up from CA$1.72b in one year. However, it does have CA$45.2m in cash offsetting this, leading to net debt of about CA$2.06b.
A Look At Baytex Energy’s Liabilities
Zooming in on the latest balance sheet data, we can see that Baytex Energy had liabilities of CA$242.6m due within 12 months and liabilities of CA$3.09b due beyond that. On the other hand, it had cash of CA$45.2m and CA$181.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$3.11b.
The deficiency here weighs heavily on the CA$1.05b 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’d watch its balance sheet closely, without a doubt At the end of the day, Baytex Energy would probably need a major re-capitalization if its creditors were to demand repayment. Either way, since Baytex Energy does have more debt than cash, it’s worth keeping an eye on its balance sheet. 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 Baytex Energy 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 Baytex Energy managed to grow its revenue by 45%, to CA$1.3b. Shareholders probably have their fingers crossed that it can grow its way to profits.
Even though Baytex Energy managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable CA$178m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through CA$3.3m in the last year. So we consider this a high risk stock and we wouldn’t be at all surprised if the company asks shareholders for money before long. For riskier companies like Baytex Energy I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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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