Cathedral Energy Services (TSE:CET) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, '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. As with many other companies Cathedral Energy Services Ltd. (TSE:CET) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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.

Check out our latest analysis for Cathedral Energy Services

How Much Debt Does Cathedral Energy Services Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Cathedral Energy Services had CA$4.43m of debt, an increase on CA$614.0k, over one year. However, it also had CA$2.45m in cash, and so its net debt is CA$1.98m.

How Healthy Is Cathedral Energy Services' Balance Sheet?

The latest balance sheet data shows that Cathedral Energy Services had liabilities of CA$12.5m due within a year, and liabilities of CA$17.7m falling due after that. On the other hand, it had cash of CA$2.45m and CA$15.2m worth of receivables due within a year. So it has liabilities totalling CA$12.5m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Cathedral Energy Services is worth CA$32.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 Cathedral Energy Services'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, Cathedral Energy Services made a loss at the EBIT level, and saw its revenue drop to CA$46m, which is a fall of 12%. That's not what we would hope to see.

Caveat Emptor

While Cathedral Energy Services's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CA$14m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$7.9m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 5 warning signs for Cathedral Energy Services (2 don't sit too well with us) 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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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.