Health Check: How Prudently Does InPlay Oil (TSE:IPO) Use 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 InPlay Oil Corp. (TSE:IPO) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for InPlay Oil

How Much Debt Does InPlay Oil Carry?

The chart below, which you can click on for greater detail, shows that InPlay Oil had CA$51.8m in debt in June 2019; about the same as the year before. Net debt is about the same, since the it doesn't have much cash.

A Look At InPlay Oil's Liabilities

According to the last reported balance sheet, InPlay Oil had liabilities of CA$15.5m due within 12 months, and liabilities of CA$130.5m due beyond 12 months. On the other hand, it had cash of CA$70.0k and CA$6.46m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$139.5m.

This deficit casts a shadow over the CA$40.3m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt At the end of the day, InPlay Oil 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 ultimately the future profitability of the business will decide if InPlay Oil can strengthen its balance sheet over time. 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, InPlay Oil reported revenue of CA$68m, which is a gain of 3.0%. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, InPlay Oil had negative earnings before interest and tax (EBIT), over the last year. Its EBIT loss was a whopping CA$8.0m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through CA$12m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. For riskier companies like InPlay Oil I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

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