Is Western Energy Services (TSE:WRG) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Western Energy Services Corp. (TSE:WRG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Western Energy Services

What Is Western Energy Services's Debt?

You can click the graphic below for the historical numbers, but it shows that Western Energy Services had CA$108.8m of debt in March 2024, down from CA$130.0m, one year before. On the flip side, it has CA$3.76m in cash leading to net debt of about CA$105.1m.

How Strong Is Western Energy Services' Balance Sheet?

The latest balance sheet data shows that Western Energy Services had liabilities of CA$25.2m due within a year, and liabilities of CA$117.2m falling due after that. On the other hand, it had cash of CA$3.76m and CA$44.6m worth of receivables due within a year. So it has liabilities totalling CA$94.1m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CA$96.5m, so it does suggest shareholders should keep an eye on Western Energy Services' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 Western Energy Services 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.

In the last year Western Energy Services had a loss before interest and tax, and actually shrunk its revenue by 5.6%, to CA$216m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Western Energy Services produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CA$951k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$10.0m. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Western Energy Services that you should be aware of.

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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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com