Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Western Energy Services Corp. (TSE:WRG) does carry debt. But the more important question is: how much risk is that debt creating?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Western Energy Services
What Is Western Energy Services's Net Debt?
The chart below, which you can click on for greater detail, shows that Western Energy Services had CA$208.5m in debt in June 2020; about the same as the year before. On the flip side, it has CA$4.78m in cash leading to net debt of about CA$203.7m.
A Look At Western Energy Services's Liabilities
Zooming in on the latest balance sheet data, we can see that Western Energy Services had liabilities of CA$18.6m due within 12 months and liabilities of CA$229.2m due beyond that. Offsetting this, it had CA$4.78m in cash and CA$4.63m in receivables that were due within 12 months. So it has liabilities totalling CA$238.5m more than its cash and near-term receivables, combined.
This deficit casts a shadow over the CA$24.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Western Energy Services would likely require a major re-capitalisation if it had to pay its creditors today. 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 Western 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 Western Energy Services had a loss before interest and tax, and actually shrunk its revenue by 31%, to CA$155m. To be frank that doesn't bode well.
Caveat Emptor
Not only did Western Energy Services's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CA$31m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost CA$87m in the last year. So we're not very excited about owning this stock. Its too risky for us. 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. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for Western Energy Services you should know about.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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Access Free AnalysisThis article by Simply Wall St is general in nature. 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.
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About TSX:WRG
Western Energy Services
Operates as an oilfield service company in Canada and the United States.
Excellent balance sheet and good value.
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