Stampede Drilling (CVE:SDI) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Stampede Drilling Inc. (CVE:SDI) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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, 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.

View our latest analysis for Stampede Drilling

What Is Stampede Drilling's Net Debt?

As you can see below, at the end of June 2021, Stampede Drilling had CA$10.6m of debt, up from CA$9.38m a year ago. Click the image for more detail. However, it also had CA$652.0k in cash, and so its net debt is CA$9.99m.

How Healthy Is Stampede Drilling's Balance Sheet?

According to the last reported balance sheet, Stampede Drilling had liabilities of CA$8.74m due within 12 months, and liabilities of CA$4.70m due beyond 12 months. Offsetting this, it had CA$652.0k in cash and CA$5.33m in receivables that were due within 12 months. So its liabilities total CA$7.45m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Stampede Drilling has a market capitalization of CA$29.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Stampede Drilling's earnings that will influence how the balance sheet holds up in the future. 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$20m, which is a fall of 17%. We would much prefer see growth.

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. Indeed, it lost CA$1.3m at the EBIT level. 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. For example, we would not want to see a repeat of last year's loss of CA$1.0m. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. 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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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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