These 4 Measures Indicate That High Arctic Energy Services (TSE:HWO) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that High Arctic Energy Services Inc (TSE:HWO) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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?

You can click the graphic below for the historical numbers, but it shows that High Arctic Energy Services had CA$3.48m of debt in March 2024, down from CA$4.16m, one year before. But it also has CA$57.0m in cash to offset that, meaning it has CA$53.6m net cash.

How Healthy Is High Arctic Energy Services' Balance Sheet?

The latest balance sheet data shows that High Arctic Energy Services had liabilities of CA$18.7m due within a year, and liabilities of CA$7.15m falling due after that. Offsetting this, it had CA$57.0m in cash and CA$19.7m in receivables that were due within 12 months. So it can boast CA$50.9m more liquid assets than total liabilities.

This surplus liquidity suggests that High Arctic Energy Services' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that High Arctic Energy Services has more cash than debt is arguably a good indication that it can manage its debt safely.

Although High Arctic Energy Services made a loss at the EBIT level, last year, it was also good to see that it generated CA$6.2m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since High Arctic Energy Services will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While High Arctic Energy Services has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, High Arctic Energy Services actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case High Arctic Energy Services has CA$53.6m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CA$16m, being 253% of its EBIT. So is High Arctic Energy Services's debt a risk? It doesn't seem so to 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. To that end, you should learn about the 2 warning signs we've spotted with High Arctic Energy Services (including 1 which is a bit unpleasant) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.