Does UK Oil & Gas (LON:UKOG) Have A Healthy Balance Sheet?

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 can see that UK Oil & Gas PLC (LON:UKOG) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for UK Oil & Gas

What Is UK Oil & Gas's Net Debt?

As you can see below, UK Oil & Gas had UK£3.09m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has UK£4.73m in cash, leading to a UK£1.64m net cash position.

A Look At UK Oil & Gas' Liabilities

Zooming in on the latest balance sheet data, we can see that UK Oil & Gas had liabilities of UK£4.15m due within 12 months and liabilities of UK£1.38m due beyond that. Offsetting this, it had UK£4.73m in cash and UK£627.0k in receivables that were due within 12 months. So it has liabilities totalling UK£176.0k more than its cash and near-term receivables, combined.

Having regard to UK Oil & Gas' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the UK£19.5m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, UK Oil & Gas boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since UK Oil & Gas 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 UK Oil & Gas wasn't profitable at an EBIT level, but managed to grow its revenue by 72%, to UK£1.6m. With any luck the company will be able to grow its way to profitability.

So How Risky Is UK Oil & Gas?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that UK Oil & Gas had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through UK£4.1m of cash and made a loss of UK£4.5m. Given it only has net cash of UK£1.64m, the company may need to raise more capital if it doesn't reach break-even soon. UK Oil & Gas's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. Case in point: We've spotted 5 warning signs for UK Oil & Gas you should be aware of, and 2 of them make us uncomfortable.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.