Does High Arctic Energy Services (TSE:HWO) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that High Arctic Energy Services Inc (TSE:HWO) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 High Arctic Energy Services

What Is High Arctic Energy Services's Net Debt?

The image below, which you can click on for greater detail, shows that High Arctic Energy Services had debt of CA$3.40m at the end of September 2024, a reduction from CA$3.57m over a year. However, its balance sheet shows it holds CA$4.11m in cash, so it actually has CA$709.0k net cash.

A Look At High Arctic Energy Services' Liabilities

According to the last reported balance sheet, High Arctic Energy Services had liabilities of CA$3.44m due within 12 months, and liabilities of CA$6.45m due beyond 12 months. Offsetting these obligations, it had cash of CA$4.11m as well as receivables valued at CA$4.01m due within 12 months. So it has liabilities totalling CA$1.77m more than its cash and near-term receivables, combined.

Given High Arctic Energy Services has a market capitalization of CA$13.9m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, High Arctic Energy Services boasts net cash, so it's fair to say it does not have a heavy debt load!

Although High Arctic Energy Services made a loss at the EBIT level, last year, it was also good to see that it generated CA$2.8m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is High Arctic Energy Services's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. High Arctic Energy Services may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, High Arctic Energy Services actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While High Arctic Energy Services does have more liabilities than liquid assets, it also has net cash of CA$709.0k. And it impressed us with free cash flow of CA$19m, being 670% of its EBIT. So is High Arctic Energy Services's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with High Arctic Energy Services .

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.