Is STEP Energy Services (TSE:STEP) Weighed On By Its Debt Load?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that STEP Energy Services Ltd. (TSE:STEP) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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.

View our latest analysis for STEP Energy Services

How Much Debt Does STEP Energy Services Carry?

You can click the graphic below for the historical numbers, but it shows that STEP Energy Services had CA$212.2m of debt in September 2020, down from CA$256.7m, one year before. However, because it has a cash reserve of CA$8.23m, its net debt is less, at about CA$204.0m.

A Look At STEP Energy Services's Liabilities

Zooming in on the latest balance sheet data, we can see that STEP Energy Services had liabilities of CA$43.4m due within 12 months and liabilities of CA$228.7m due beyond that. On the other hand, it had cash of CA$8.23m and CA$58.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$205.1m.

The deficiency here weighs heavily on the CA$51.4m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, STEP Energy Services 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 it is future earnings, more than anything, that will determine STEP Energy Services's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year STEP Energy Services had a loss before interest and tax, and actually shrunk its revenue by 40%, to CA$424m. To be frank that doesn't bode well.

Caveat Emptor

Not only did STEP Energy Services's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CA$71m at the EBIT level. 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 since it is low on liquid assets, and made a loss of CA$127m in the last year. So while it's not wise to assume the company will fail, we do think it's 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. Take risks, for example - STEP Energy Services has 3 warning signs we think 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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