Western Energy Services (TSE:WRG) Has Debt But No Earnings; Should You Worry?

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.' 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 Western Energy Services Corp. (TSE:WRG) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Western Energy Services

How Much Debt Does Western Energy Services Carry?

The chart below, which you can click on for greater detail, shows that Western Energy Services had CA$221.5m in debt in September 2020; about the same as the year before. However, it does have CA$7.30m in cash offsetting this, leading to net debt of about CA$214.2m.

How Healthy Is Western Energy Services's Balance Sheet?

According to the last reported balance sheet, Western Energy Services had liabilities of CA$16.5m due within 12 months, and liabilities of CA$237.9m due beyond 12 months. Offsetting these obligations, it had cash of CA$7.30m as well as receivables valued at CA$10.6m due within 12 months. So its liabilities total CA$236.5m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CA$33.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. 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 it is future earnings, more than anything, that will determine Western 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.

Over 12 months, Western Energy Services made a loss at the EBIT level, and saw its revenue drop to CA$122m, which is a fall of 43%. That makes us nervous, to say the least.

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). Indeed, it lost a very considerable CA$30m at the EBIT level. 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$86m in the last year. So we think buying this stock is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Western 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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This 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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