Is PetroShale (CVE:PSH) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 PetroShale Inc. (CVE:PSH) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for PetroShale

How Much Debt Does PetroShale Carry?

You can click the graphic below for the historical numbers, but it shows that PetroShale had CA$184.7m of debt in June 2021, down from CA$332.3m, one year before. However, it does have CA$10.5m in cash offsetting this, leading to net debt of about CA$174.2m.

How Healthy Is PetroShale's Balance Sheet?

We can see from the most recent balance sheet that PetroShale had liabilities of CA$74.3m falling due within a year, and liabilities of CA$194.1m due beyond that. On the other hand, it had cash of CA$10.5m and CA$27.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$230.2m.

Given this deficit is actually higher than the company's market capitalization of CA$208.4m, we think shareholders really should watch PetroShale's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But it is PetroShale's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year PetroShale had a loss before interest and tax, and actually shrunk its revenue by 13%, to CA$129m. We would much prefer see growth.

Caveat Emptor

Not only did PetroShale'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. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of CA$62m. And until that time we think this is a risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for PetroShale (2 can't be ignored!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.

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