Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Secure Energy Services Inc. (TSE:SES) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is Secure Energy Services's Debt?
As you can see below, Secure Energy Services had CA$392.9m of debt at March 2021, down from CA$451.0m a year prior. However, it does have CA$17.5m in cash offsetting this, leading to net debt of about CA$375.4m.
A Look At Secure Energy Services' Liabilities
We can see from the most recent balance sheet that Secure Energy Services had liabilities of CA$167.3m falling due within a year, and liabilities of CA$538.4m due beyond that. On the other hand, it had cash of CA$17.5m and CA$154.3m worth of receivables due within a year. So its liabilities total CA$533.9m more than the combination of its cash and short-term receivables.
This is a mountain of leverage relative to its market capitalization of CA$696.3m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Secure Energy Services 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 Secure Energy Services had a loss before interest and tax, and actually shrunk its revenue by 35%, to CA$1.9b. To be frank that doesn't bode well.
While Secure Energy Services's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CA$41m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CA$64m. In the meantime, we consider the stock very risky. 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. For instance, we've identified 2 warning signs for Secure Energy Services that you should be aware of.
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.
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