Is Stampede Drilling (CVE:SDI) A Risky Investment?

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 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 the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Stampede Drilling

What Is Stampede Drilling's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Stampede Drilling had CA$11.6m of debt, an increase on CA$11.0m, over one year. On the flip side, it has CA$630.0k in cash leading to net debt of about CA$10.9m.

A Look At Stampede Drilling's Liabilities

The latest balance sheet data shows that Stampede Drilling had liabilities of CA$10.3m due within a year, and liabilities of CA$4.74m falling due after that. Offsetting these obligations, it had cash of CA$630.0k as well as receivables valued at CA$6.99m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$7.39m.

Stampede Drilling has a market capitalization of CA$21.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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.

In the last year Stampede Drilling wasn't profitable at an EBIT level, but managed to grow its revenue by 37%, to CA$25m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Stampede Drilling still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$96k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Surprisingly, we note that it actually reported positive free cash flow of CA$862k and a profit of CA$814k. So one might argue that there's still a chance it can get things on the right track. 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. Case in point: We've spotted 3 warning signs for Stampede Drilling 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. 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.