Would UK Oil & Gas (LON:UKOG) Be Better Off With Less 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.' 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. 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 Dangerous?

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. If things get really bad, the lenders can take control of the business. 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.

See our latest analysis for UK Oil & Gas

How Much Debt Does UK Oil & Gas Carry?

As you can see below, UK Oil & Gas had UK£3.09m of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have UK£2.33m in cash offsetting this, leading to net debt of about UK£767.0k.

How Healthy Is UK Oil & Gas' Balance Sheet?

According to the last reported balance sheet, UK Oil & Gas had liabilities of UK£3.91m due within 12 months, and liabilities of UK£1.44m due beyond 12 months. Offsetting these obligations, it had cash of UK£2.33m as well as receivables valued at UK£750.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£2.28m.

Given UK Oil & Gas has a market capitalization of UK£15.3m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since UK Oil & Gas will need earnings to service that debt. 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 UK Oil & Gas wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to UK£1.8m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, UK Oil & Gas had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable UK£4.8m at the EBIT level. 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. However, it doesn't help that it burned through UK£4.7m of cash over the last year. So in short it's a really risky stock. 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. To that end, you should learn about the 5 warning signs we've spotted with UK Oil & Gas (including 3 which are a bit concerning) .

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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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.