Here's Why Stampede Drilling (CVE:SDI) Can Afford Some Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Stampede Drilling Inc. (CVE:SDI) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Stampede Drilling

How Much Debt Does Stampede Drilling Carry?

As you can see below, at the end of December 2020, Stampede Drilling had CA$12.7m of debt, up from CA$11.0m a year ago. Click the image for more detail. However, because it has a cash reserve of CA$684.0k, its net debt is less, at about CA$12.1m.

How Strong Is Stampede Drilling's Balance Sheet?

We can see from the most recent balance sheet that Stampede Drilling had liabilities of CA$10.0m falling due within a year, and liabilities of CA$5.01m due beyond that. On the other hand, it had cash of CA$684.0k and CA$3.41m worth of receivables due within a year. So it has liabilities totalling CA$10.9m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Stampede Drilling has a market capitalization of CA$27.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Stampede Drilling will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Stampede Drilling made a loss at the EBIT level, and saw its revenue drop to CA$14m, which is a fall of 39%. That makes us nervous, to say the least.

Caveat Emptor

While Stampede Drilling's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CA$2.7m. 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$4.0m. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Stampede Drilling .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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