Stampede Drilling (CVE:SDI) Is Making Moderate Use Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Stampede Drilling Inc. (CVE:SDI) does use debt in its business. 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. 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 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

How Much Debt Does Stampede Drilling Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Stampede Drilling had debt of CA$11.0m, up from CA$8.97m in one year. However, it also had CA$724.0k in cash, and so its net debt is CA$10.2m.

A Look At Stampede Drilling's Liabilities

We can see from the most recent balance sheet that Stampede Drilling had liabilities of CA$9.55m falling due within a year, and liabilities of CA$2.89m due beyond that. Offsetting these obligations, it had cash of CA$724.0k as well as receivables valued at CA$1.30m due within 12 months. So its liabilities total CA$10.4m more than the combination of its cash and short-term receivables.

Stampede Drilling has a market capitalization of CA$18.5m, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Stampede Drilling'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 Stampede Drilling had a loss before interest and tax, and actually shrunk its revenue by 19%, to CA$19m. 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 a very considerable CA$1.9m 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. However, it doesn't help that it burned through CA$459k of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Stampede Drilling (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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.

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