Is Frontera Energy (TSE:FEC) Weighed On By Its Debt Load?

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 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. Importantly, Frontera Energy Corporation (TSE:FEC) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Frontera Energy

How Much Debt Does Frontera Energy Carry?

As you can see below, Frontera Energy had US$566.5m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has US$318.8m in cash leading to net debt of about US$247.7m.

How Healthy Is Frontera Energy's Balance Sheet?

We can see from the most recent balance sheet that Frontera Energy had liabilities of US$729.2m falling due within a year, and liabilities of US$585.0m due beyond that. Offsetting this, it had US$318.8m in cash and US$143.1m in receivables that were due within 12 months. So it has liabilities totalling US$852.2m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's US$657.0m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive 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 Frontera Energy'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, Frontera Energy made a loss at the EBIT level, and saw its revenue drop to US$769m, which is a fall of 6.5%. We would much prefer see growth.

Caveat Emptor

Importantly, Frontera Energy had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$53m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. But on the bright side the company actually produced a statutory profit of US$47m and free cash flow of US$65m. So one might argue that there's still a chance it can get things on the right track. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Frontera Energy you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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