David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Precision Drilling Corporation (TSE:PD) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Precision Drilling's Debt?
As you can see below, Precision Drilling had CA$1.11b of debt at December 2021, down from CA$1.24b a year prior. However, because it has a cash reserve of CA$40.6m, its net debt is less, at about CA$1.07b.
A Look At Precision Drilling's Liabilities
The latest balance sheet data shows that Precision Drilling had liabilities of CA$238.1m due within a year, and liabilities of CA$1.20b falling due after that. Offsetting these obligations, it had cash of CA$40.6m as well as receivables valued at CA$179.6m due within 12 months. So it has liabilities totalling CA$1.22b more than its cash and near-term receivables, combined.
Given this deficit is actually higher than the company's market capitalization of CA$1.07b, we think shareholders really should watch Precision Drilling's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 Precision Drilling 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 Precision Drilling wasn't profitable at an EBIT level, but managed to grow its revenue by 5.5%, to CA$987m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Over the last twelve months Precision Drilling produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$114m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of CA$177m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Precision Drilling is showing 2 warning signs in our investment analysis , you should know about...
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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.