Essential Energy Services (TSE:ESN) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Essential Energy Services Ltd. (TSE:ESN) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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, 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.

View our latest analysis for Essential Energy Services

How Much Debt Does Essential Energy Services Carry?

The image below, which you can click on for greater detail, shows that at June 2023 Essential Energy Services had debt of CA$6.25m, up from none in one year. On the flip side, it has CA$2.15m in cash leading to net debt of about CA$4.10m.

A Look At Essential Energy Services' Liabilities

We can see from the most recent balance sheet that Essential Energy Services had liabilities of CA$19.2m falling due within a year, and liabilities of CA$15.5m due beyond that. Offsetting these obligations, it had cash of CA$2.15m as well as receivables valued at CA$22.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$10.4m.

While this might seem like a lot, it is not so bad since Essential Energy Services has a market capitalization of CA$45.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Essential Energy Services 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 Essential Energy Services wasn't profitable at an EBIT level, but managed to grow its revenue by 17%, to CA$158m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Essential Energy Services had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$408k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Surprisingly, we note that it actually reported positive free cash flow of CA$833k and a profit of CA$952k. So one might argue that there's still a chance it can get things on the right track. 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 example, we've discovered 2 warning signs for Essential Energy Services that you should be aware of before investing here.

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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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.