Is Ensign Energy Services (TSE:ESI) Using Too Much Debt?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Ensign Energy Services Inc. (TSE:ESI) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Ensign Energy Services

What Is Ensign Energy Services's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Ensign Energy Services had CA$1.36b of debt in March 2021, down from CA$1.64b, one year before. On the flip side, it has CA$33.4m in cash leading to net debt of about CA$1.33b.

How Strong Is Ensign Energy Services' Balance Sheet?

We can see from the most recent balance sheet that Ensign Energy Services had liabilities of CA$159.7m falling due within a year, and liabilities of CA$1.49b due beyond that. On the other hand, it had cash of CA$33.4m and CA$177.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$1.44b.

The deficiency here weighs heavily on the CA$211.1m 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'd watch its balance sheet closely, without a doubt. At the end of the day, Ensign Energy Services would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Ensign Energy Services's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Ensign Energy Services made a loss at the EBIT level, and saw its revenue drop to CA$772m, which is a fall of 50%. That makes us nervous, to say the least.

Caveat Emptor

While Ensign 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$168m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost CA$82m in the last year. So we're not very excited about owning this stock. Its too risky for us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Ensign Energy Services is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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